MICHAEL FRANCISCO, individuаlly and on behalf of all others similarly situated, Plaintiff, v. ABENGOA, S.A., SANTIAGO SEAGE, MANUEL SANCHEZ ORTEGA, BARBARA ZUBIRIA, and IGNACIO GARCIA ALVEAR, Defendants.
15 Civ. 6279 (ER)
UNITED STATES DISTRICT COURT SOUTHERN
September 10, 2021
OPINION & ORDER
RAMOS, D.J.:
Lead Plaintiffs Jesse and Arlette Sherman and Plaintiff PAMCAH-UA Local 675 Pension Fund (“Local 675 Pension Fund,” and together with Lead Plaintiffs, “Plaintiffs“), bring this federal securities class action against Abengoa S.A. (“Abengoa“); Manuel Sanchez Ortega, Abengoa’s former chief executive officer; Christopher Hansmeyer, the duly authorized representative for Abengoa in the United States; and HSBC Securities (USA) Inc., Banco Santander S.A. (“Banco Santander“), Canaccord Genuity Inc., Merrill Lynch International, and Société Générale, investment banks that served as underwriters for Abengoa’s United States offering (collectively, the “Underwriter Defendants“). In their Proposed Third Amended Complaint (“PTAC“), Plaintiffs seek to pursue remedies under
Pending before the Court is Plaintiffs’ motion for leave to file the PTAC. Doc. 142. For the following reasons, Plaintiffs’ motion is GRANTED in part and DENIED in part.
I. BACKGROUND
A. Factual Background
The Court assumes familiarity with the parties and its prior opinion in this matter, Francisco v. Abengoa, S.A., 481 F. Supp. 3d 179 (S.D.N.Y. 2020).
Abengoa, founded in 1941, is an engineering and clean technology company headquartered in Spain. Doc. 144-1 ¶ 24. Sanchez Ortega served as Abengoa’s CEO from March 2010 until his resignation on May 19, 2015, and Hansmeyer was its duly authorized representative in the United States. Id. ¶¶ 25, 27.
This action relates to Abengoa’s October 17, 2013 public offering on the NASDAQ Global Select Market (the “NASDAQ“) for €517.5 million, which Underwriter Defendants underwrote, and to the subsequent series of events culminating in the company’s filing for insolvency and bankruptcy. Id. ¶¶ 28, 162–72. Lead Plaintiffs Jesse and Arlette Sherman and Local 675 Pension Fund purchased Abengoa ADSs during the Class Period. Id. ¶ 23. Specifically, the Shermans began trading Abengoa ADSs beginning November 18, 2014, Doc. 7-1, and Local 675 Pension Fund first purchased Abengoa ADSs on April 6, 2015, Doc. 12-1.
The following facts are taken from the PTAC and are assumed to be true for purposes of the instant motion.
1. The Offering
On October 4, 2013, in preparation for the offering, Abengoa filed a Registration Statement with the Securities and Exchange Commission (“SEC“) on Form F-1, offering U.S. investors Class B shares in the form of ADSs, each of which represented the right to receive five Class B shares. Doc. 144-1 ¶ 123. Underwriter Defendants helped to draft and disseminate the Registration Statement. Id. ¶ 28. Non-party Barbara Zubiría Furest—who served as Abengoa’s co-chief financial officer and executive vice president of capital markets and investor relationships from January 2011 until her resignation, which was announced on January 19, 2015—signed the Registration Statement. Id. ¶ 36.
At the time of the offering, Abengoa was comprised of 532 subsidiaries, 17 associates, and 34 joint ventures, and was operating in over 70 countries. Id. ¶ 53. Abengoa used two types of debt: recourse debt and non-recourse debt. See id. ¶¶ 274–76, 335–36; see also Abengoa, 481 F. Supp. 3d at 188. Recourse debt—also referred to as “corporate debt“—was guaranteed by Abengoa. Doc. 144-1 ¶¶ 246, 274–76; see also Abengoa, 481 F. Supp. 3d at 188. Non-recourse debt, which was used to finance specific projects, was guaranteed by the assets and cash flows of companies formed to carry out those projects. Doc. 144-1 ¶¶ 246, 274–76; see also Abengoa, 481 F. Supp. 3d at 188. In other words, non-recourse debt was not secured by Abengoa in the event of a default. See Doc. 144-1 ¶¶ 276, 353, 355; see also Abengoa, 481 F. Supp. 3d at 188.
The Registration Statement made representations about Abengoa’s cash flow and liquidity, its debt usage and financing for long-term projects, and its accounting policies. Doc. 144-1 ¶¶ 196–203, 219–221, 226. The Registration Statement contained the following language regarding its operations for financing construction projects:
We have successfully grown our business while seeking to enforce strict financial discipline to maintain our strong liquidity position. As of June 20, 2013, we had сash and cash equivalents and short-term financial investments of €3,222 million, which we believe are sufficient to satisfy our short-term liquidity needs. This strong cash position also assists in bidding for large projects.
Id. ¶ 130 (emphases omitted). It also contained the following statement regarding Abengoa’s “percentage-of-completion” accounting policy:
Revenue from construction contracts is recognized using the percentage-of-completion method for contracts whose outcome can be reliably estimated and it is probable that they will be profitable. When the outcome of a construction contract cannot be reliably estimated, revenue is recognized only to the extent it is probable that contract costs incurred will be recoverable.
As described in Note 2.26.b) to our Annual Consolidated Financial Statements and our Interim Consolidated Financial Statements, the percentage of completion is determined at the date of every consolidated statement of financial position based on the actual costs incurred as a percentage of total estimated costs for the entire contract.
Revenue recognition using the percentage-of-completion method involves the use of estimates of certain key elements of the construction contracts, such as total estimate contract costs, allowances or provisions related to the contract, period of execution of the contract and recoverability of the claims. We have established, over the years, a robust project management and control system, with periodic monitoring of each project. This system is based on the long-track experience of the Group in constructing complex infrastructures and installations. As far as practicable, we apply past experience in estimating the main elеments of construction contracts and rely on objective data such as physical inspections or third parties [sic] confirmations. Nevertheless, given the highly tailored characteristics of the construction contracts, most of the estimates are unique to the specific facts and circumstances of each contract. When the outcome of a construction contract can be reliably estimated and it is probable that it will be profitable, revenue from the contract is recognized over the term of the contract. When it is probable that the costs of the project will be greater than its revenue, expected loss is recognized immediately as an expense. To determine the appropriate amount of revenue to be recognized in any period, the percentage of completion method is applied. The percentage of completion method considers, at the date of the Statement of Financial Position, the actual costs incurred as a percentage of total estimated costs for the
entire contract. Costs incurred in the period which relate to future project activities are not included when determining the percentage of completion. Prepayments and certain other assets are recognized as inventories, depending on their specific nature.
Id. ¶ 197 (emphases omitted).
On October 16, 2013, Abengoa filed a Prospectus with the SEC, which formed part of the Registration Statement. Id. ¶ 125. According to the Prospectus, Abengoa was offering to the public 250,000,000 Class B shares at €1.80 per share (or $12.18 per ADS). Id. On October 17, 2013, Abengoa went public in the United States and began selling its ADSs on the NASDAQ exchange. See id. ¶ 126. Abengoa realized €517.5 million in gross proceeds—or roughly $703.8 million—from the offering. Id. ¶ 127. In the Registration Statement, Abengoa represented that it intended to use those proceeds to repay €347 million in corporаte debt maturities due in 2013 and 2014. Id. ¶ 128.
2. Positive Financial Reports
After the offering, Abengoa made several reports of positive financial results. On November 11, 2013, Abengoa reported its financial results for the nine months ending September 30, 2013. Id. ¶ 227. It reported that its EBITDA had risen 29% year-over-year and that Abengoa was accelerating its deleverage targets. Id. At a subsequent conference call, Sanchez Ortega reiterated these results and remarked positively on the company’s financial position, leverage ratios, cash flow, and EBITDA. See id. ¶¶ 228–29. Abengoa’s financial results for the full year ending December 31, 2013, which were announced on February 20, 2014, were similarly positive. See id. ¶¶ 234–36.
On March 19, 2014, Abengoa filed its annual report for the year ending December 31, 2013, signed and certified by Sanchez Ortega, with the SEC pursuant to the
3. The Greenfield Bonds
During strategy-update presentations on September 3 and 4, 2014, Abengoa announced that the company was transitioning to an “asset-light” business model, aimed at generating cash throughout the life cycle of construction projects. Id. ¶¶ 147–48. This was due in part to investors’ concerns about Abengoa’s balance sheet. Id. ¶ 147. To achieve the “asset-light” model, Abengoa would create a subsidiary—Abengoa Greenfield, S.A. (“Abengoa Greenfield“)—that would secure short-term “bridge” financing from Abengoa’s external partners for the beginning stages of new projects. Id. According to the new model, completed projects would be sold to another Abengoa subsidiary—Abengoa Yiеld—and Abengoa would reinvest a portion of those proceeds in new projects via Abengoa Greenfield. Id. ¶ 148.
On September 22, 2014, Abengoa announced that Abengoa Greenfield would issue €500 million in bonds (the “Greenfield Bonds“). Id. ¶ 149. Abengoa represented that the company would guarantee the bonds, and that it intended to classify the bonds as corporate recourse debt upon
4. The November 2014 Disclosures
In November 2014, Abengoa made a series of disclosures related to its debt characterization and other practices (the “November 2014 Disclosures“).
On November 12, 2014, Abengoa announced its financial results for the nine months ending on September 30, 2014. Id. ¶ 270. Abengoa reported that EBITDA had risen 24% year-over-year, and that its corporate leverage ratio was 2.1x, a .4x reduction from the previous quarter. Id. In a conference call with analysts later that day, Sanchez Ortega and Zubiría Furest reiterated optimism about the company’s cash flow and liquidity. Id. ¶¶ 271–73.
During the call, an HSBC analyst sought clarification regarding the Greenfield Bonds, noting that they did not seem to be included in Abengoa’s reported corporate leverage ratio despite Abengoa’s representations that it would guarantee those bonds. Id. ¶ 275. Zubiría Furest then revealed that Abengoa had reclassified the Greenfield Bonds as non-recourse debt—and more specifically, under the category “nonrecourse financing in process,” which was excluded from the corporate leverage ratio. Id. (alterations omitted). When a Barclays analyst made the same observation—noting that “obviously the [G]reenfield [B]onds . . . are the same as the other debts guaranteed by Abengoa. And yet, you’re not including it in the corporate debt. I just wanted to understand why“—Zubiría Furest stated that the bonds were “classified in a different bucket. . . . It is preoperational nonrecourse debt. And that is accounted for as what we call nonrecourse debt . . . .” Id. ¶ 276. In response to the revelation that Abengoa had reclassified the Greenfield Bonds, the price of Abengoa ADSs fell nearly 50% over the next three trading days, falling from a closing price of $17.59 per ADS to $8.83 per ADS. Id. ¶ 277.
On November 17, 2014, Abengoa held another call in an effort to repair its credibility. Doc. 144-1 ¶ 278. The company revealed that Abengoa accounted for a total of €1.595 billion as non-recourse debt in process—including the €500 million in Greenfield Bonds. See id. ¶ 279. As non-recourse debt in process, that amount had not been included in Abengoa’s corporate leverage ratio. See id. After including non-recourse debt in process, Abengoa’s corporate leverage ratio was 3.9x. Id. ¶ 280. Abengoa further revealed that its “total net debt” was over €9 billion and its “total net leverage” ratio was 5.6x. Id. Zubiría Furest also disclosed that Abengoa did not characterize “approximately €1 billion of cash linked to supplier payments that is set aside on collateral accounts” as debt. Id. (alterations omitted). Despite these disclosures, Sanchez Ortega and Zubiría Furest2 continued to highlight Abengoa’s purportedly sound liquidity position. Id. ¶ 281.
5. Subsequent Reports, Transactions, and Protocols
Throughout 2015, Abengoa continued to report that it had a healthy level of liquidity
Despite these assurances and representations, on May 8, 2015, Abengoa borrowed 95 million Class B shares from its majority shareholder, equal to 10% of its total outstanding stock and worth approximately €275 million. Id. ¶¶ 150, 338. That same day, Abengoa agreed to subscribe to 51% of a $670 million capital increase that Abengoa Yield had announced, designed to fund the acquisition of four solar power assets owned by Abengoa. Id. ¶¶ 151, 338. Analysts questioned the timing of these transactions, noting that it would be “surprising and worrying” if the shares were used to get access to funding. Id. ¶ 152.
On May 14, 2015, Abengoa announced its financial results for the quarter ending March 31, 2015, reporting a corporate leverage ratio of 2 and emphasizing its liquidity position. Id. ¶¶ 310–14.
On May 19, 2015, Sanchez Ortega resigned from his position as CEO but continued as non-executive First Vice Chairman and joined Abengoa’s International Advisory Board. Id. ¶¶ 25, 339. He was replaced by Santiago Seage. Id. ¶ 35.
Additionally, in May 2015, Abengoa created a “Controller Department” to audit past projects. Id. ¶ 337. According to Plaintiffs, the margins of projects had stayed relatively consistent until dropping drastically upon their completion, and the newly created department would determine why. Id. During this time, Abengoa’s IT subsidiary—Simosa IT—purchased a new project management system to address the account-entry protocols in place with another one of Abengoa’s subsidiaries, Abeinsa Ingeniería y Construcción Industrial S.A. (“Abeinsa“), which served as the head of Abengoa’s engineering and construction group—one of Abengoa’s three main business groups. Id. ¶¶ 3, 54, 87, 337. According to Plaintiffs, activity from the engineering and construction group represented more than 60% of Abengoa’s overall consolidated annual sales, rendering the group—and by extension, Abeinsa—the primary focus of Abengoa’s executive management and senior leadership throughout the Class Period. Id. ¶¶ 56–58.
On June 29, 2015, another Abengoa subsidiary—Abengoa Concessions Investment Limited (“Abengoa Concessions“)—entered into a margin loan facility agreement, pursuant to which Abengoa Concessions could borrow up to $200 million. Id. ¶ 153. As collateral for the loan, Abengoa pоsted a 14% stake in Abengoa Yield, worth approximately $450 million. Id. ¶ 154.
On July 16, 2015, Abengoa announced that it had sold all of its Class B shares in treasury stock to raise €97.6 million. Id. ¶ 157. This announcement further raised suspicions, as stated in a July 17, 2015 Reuters article and a BPI analyst report issued on the same day. Doc. 144-1 ¶¶ 158–59.
6. July 31, 2015 Disclosures
On Friday, July 31, 2015, Abengoa issued a press release announcing its financial results for the six months ending on June 30, 2015. Id. ¶ 318. Once more, the company reported “strong business performance.” Id. (alteration omitted). Later that day, Abengoa held a conference call with analysts and investors to discuss these results. Id. ¶ 319. Plaintiffs allege that, during that call, Abengoa “had finally begun to reveal signs that its financial
But on the next business day, August 3, 2015, Abengoa announced that it was doing just that, seeking shareholder approval of a capital increase with preemptive rights of €650 million and asset divestitures totaling €500 million, plus additional divestitures of bioenergy assets. Id. ¶¶ 342, 359. The company stated that these “significant actions” were necessary to “reduce corporate debt” and “reinforce [Abengoa’s] balance sheet.” Id. ¶ 359. Plaintiffs allege that analysts and investors were “stunned,” citing to reports and articles by Canaccord Genuity, Citi, and Bloomberg. Id. ¶¶ 361–64. The price of Abengoa’s ADSs fell nearly 30%, from a closing price of $11.06 per share on July 31, 2015 to $7.75 per share on August 3, 2015. Id. ¶ 365. The price fell an additional $1.75 per share the following trading day, resulting in losses of $8.1 billion in market capitalization and approximately $837 million in ADS market share. Id.
7. Liquidity Crisis and Bankruptcy
On November 8, 2015, Abengoa announced that Gonvarri Corparación Financiera (“Gonvarri“), a Spanish investment firm, had agreed to invest €350 million in connection with Abengoa’s planned capital increase. Doc. 144-1 ¶ 162. However, on November 25, 2015, Abengoa announced that Gonvarri had cancelled that agreement. Id. ¶ 163.
That same day, Abengoa announced that it was filing for preliminary creditor protection under the Spanish Insolvency Law, which allowed it four months to reach an agreement with its creditors. Id. Shortly thereafter on November 27, 2015, Seage resigned from his position at Abengoa. Id. ¶ 165. Between February 24, 2016 and April 7, 2016, dozens of Abengoa’s U.S.-based affiliates filed for
On March 10, 2016, Abengoa announced that it had reached a preliminary debt-restructuring agreement with its creditors. Id. ¶ 167. On March 28, 2016, Abengoa filed for bankruptcy protection pursuant to
Both of Abengoa’s bankruptcy proceedings concluded in mid-2019, and Abengoa now operates according to a court-approved reorganization plan. Id. ¶ 172.
8. Criminal Proceedings
In the PTAC, Plaintiffs assert that two Spanish criminal proceedings are relevant to the instant suit.
First, on March 22, 2016, Abengoa’s investors filed a criminal complaint against Sanchez Ortega and Felipe Benjumea Llorente—the former executive chairman of
Second, in the Criminal Investigation Court in Seville, investors filed a criminal action in June 2018 against two Abengoa subsidiaries—Abeinsa and Instalaciones Inabensa S.A. (“Inabensa“)—along with various senior officers of Abengoa for accounting fraud and misrepresentation; the PTAC does not indicate whether any of the defendants in the instant suit are named in that proceeding. Id. ¶¶ 3, 188–89. Inabensa led Abeinsa’s “Installations” division within the engineering and construction group.3 Id. ¶ 55. On June 9, 2020, the investigating judge—i.e., the judge presiding over the investigatory stage of the criminal proceeding—elevated the action as to Abeinsa and Inabensa to the National Court—i.e., the same court overseeing the criminal claims against Sanchez Ortega, Benjumea Llorente, and Abengoa. See id. ¶¶ 176, 190. On November 6, 2020, the Spanish National Court reversed that decision, transferring the matter back to the Criminal Investigation Court in Seville. Docs. 161 and 161-1.4
The PTAC is silent as to whether either of these proceedings has progressed beyond the investigatory stage.
B. Procedural History
Plaintiff Michael Francisco, individually and on behalf of all others similarly situated, first filed his complaint bringing Exchange Act claims against Abengoa, Seage, Sanchez Ortega, Zubiría Furest, and Ignacio Garcia Alvear (Zubiría’s Furest’s successor, Doc. 88 ¶ 29) on August 10, 2015. Doc. 1. In a related case, Daniel LaMoureaux, individually and on behalf of all others similarly situated, filed suit against the same parties on September 3, 2015. LaMoureaux v. Abengoa, S.A., No. 15 Civ. 6971 (S.D.N.Y.), Doc. 1. On October 9, 2015, Jesse and Arlette Sherman moved to consolidate the actions and for appointment as lead plaintiffs. Doc. 5. Local 675 Pension Fund similarly moved on October 9, 2015. Doc. 8. On May 24, 2016, the Court granted the motions to consolidate and the Shermans’ motion for appointment as lead plaintiffs, and denied the pension fund’s.
On September 10, 2019, Abengoa wrote to advise the Court that its
On October 28, 2019, Plaintiffs filed their Second Amended Complaint, Doc. 88, which Underwriter Defendants, Sanchez Ortega, and Abengoa moved to dismiss, Docs. 109, 113, and 115. On April 30, 2020, Plaintiffs requested a pre-motion conference for a contemplated motion for leave to amend their complaint, citing new information that had come to light in connection with the criminal proceedings in Spain. Doc. 120. At a teleconference on May 19, 2020, the Court denied that request in light of the pending motions to dismiss, and Plaintiffs indicated that they would seek leave to amend their complaint in the event that the Court granted Defendants’ motions.
On August 20, 2020, the Court granted Dеfendants’ motions to dismiss the Second Amended Complaint and granted Plaintiffs leave to move to amend their complaint; on August 21, 2020, the Court entered an amended order. Abengoa, 481 F. Supp. 3d at 216.
On September 30, 2020, Plaintiffs filed the instant motion and PTAC. Doc. 142.
C. Claim-specific Allegations
Plaintiffs bifurcate the PTAC into: (1) Securities Act allegations and (2) Exchange Act allegations. To support those allegations, Plaintiffs rely on the accounts of a number of confidential witnesses, as well as three reports conducted after the Class Period.
1. Confidential Witnesses
More specifically, Plaintiffs rely on information obtained from seven confidential witnesses, all of whom were former Abengoa employees.
a. FE7
Plaintiffs rely most heavily on information provided by “FE7.” FE7, who worked for Inabensa, is a confidential whistleblower who on April 10, 2017 submitted a detailed letter to the Office of the Prosecutor of the National Court in Spain, describing widespread, systemic accounting fraud at Abengoa. Doc. 144-1 ¶¶ 45, 74, 98. Moreover, as Plaintiffs note, that letter includes information regarding Abengoa’s chain of reporting, its internal management controls, screenshots of Abengoa’s internal accounting files from one of Inabensa’s servers, and specific examples of falsified project margins; taken together, these characteristics, according to Plaintiffs, indicate that FE7 worked within Inabensa’s Controller Department between at least 2013 and 2015, and was responsible for overseeing the subsidiary’s financial accounting and reporting. Id. ¶ 46.
Separate from the SAP software, project managers maintained their own project management records on Excel spreadsheets, which recorded the same categories of information contained in the SAP records. Id. ¶ 66. However, the project managers did not have the same compliance standards for their Excel spreadsheets, and these spreadsheets reflected the actual costs, expenses, and margins of the projects. Id.
According to FE7, this dual accounting system was commonplace and widely known within Abengoa. Id. ¶ 67. Indeed, FE7 notes that, when project managers were asked for a margin estimate, they would reply by asking whether the requester wanted the official SAP margin or the accurate margin in the Excel spreadsheet. Id. Moreover, FE7 avers that this dual accounting system was intentional, allowing Abengoa to rely on the SAP records to portray a more profitable and liquid appearance to the public, while allоwing various members of Abengoa’s management to increase projected earnings so that they could meet bonus objectives set by the company. Id. ¶ 68.
Beyond broadly describing the dual accounting system, FE7 also specified instances in which the project margins were inflated to rapidly accelerate purported project revenue. First, FE7 states that, in December 2014, Inabensa increased the margin for the DGEN project—an electrical line project in India—to 86%, allowing Inabensa to recognize a profit of €2.947 million in 2014. Id. ¶ 69. That figure represented the total estimated profit for the entire project, and Abengoa was able to recognize that profit even though the project “had hardly even started.” Id. (quotation omitted).
Second, FE7 notes a few instances in which Abengoa allegedly falsified costs to accelerate the recognition of revenue on projects. Again, Abengoa’s accounting standards allowed the company to recognize revenue on projects in proportion to the costs the company incurred on the project and that project’s percentage of
According to Plaintiffs, the fact that the provisions increased in frequency and amount—and towards the end of the year—shows that Inabensa abused these cost provisions to inflate its revenues and margins for year-end audits and reports. Id. And more broadly, Plaintiffs note FE7’s conclusion that, because these accounting practices “required coordination from other companies within Abeinsa and senior levels of management,” these practices had been done by all large project companies within Abengoa. Id. ¶ 74.
b. FE1
Plaintiffs allege that the accounts of the other six confidential witnesses corroborate the information in FE7’s whistleblower letter. Id. ¶ 75. “FE1” was the Director of Human Resources at Abeinsa’s U.S. subsidiary, Abeinsa EPC. Id. ¶ 114. FE1 maintains that she repeatedly heard from employees in Abeinsa’s accounting department that Abeinsa maintained two sets of books—keeping one set for its external auditor while maintaining a separate set for internal purposes. Id. ¶ 76.
According to FE1, shortly before the offering, Abeinsa’s internal auditor tendered his letter of resignation to FE1, and FE1 subsequently conducted an exit interview with him. Id. ¶ 114. FE1 claims that, during that interview, the internal auditor stated that he was resigning because he had been directed to sign off on financial reports that falsely inflated the value of certain projects, explaining that the reports showed false percentages of completion on some projects and failed to show that some projects were, in fact, over budget. Id. According to FE1, the internal auditor stated that those financial reports had been prepared to present to banks in order to obtain larger lines of credit. Id.
FE1 also emphasized that cash flow was a critical financial metric for Abengoa and described various tactics the company engaged in to artificially increase the amount of cash on its books. Doc. 144-1 ¶ 136. As an example, FE1 notes that Abengoa held a training class during which managers were taught to reject supplier invoices, so that payment would be delayed, thereby increasing the company’s reported cash position. Id. More specifically, according to FE1, because Abeinsa’s contracts provided that rejected invoices could not be resubmitted for thirty days, this practice of rejecting invoices helped to preserve Abeinsa’s cash on hand, increasing its reported cash flow. Id. FE1 also claimed that Abengoa routinely refused to pay contractors on its projects, instead forcing them to file liens against the company to ultimately settle their claims in arbitration for “pennies on the dollar.” Id. ¶ 138.
c. FE2
“FE2” is a former Abengoa employee who Plaintiffs allege had broad oversight over accounting and financial reporting at several of Abengoa’s U.S. subsidiaries. Id. ¶¶ 40, 77. FE2 confirmed that Abengoa U.S. subsidiaries maintained two sets of accounting reports: one for external auditors and the other for internal use. Id. ¶ 77. According to Plaintiffs, FE2 also states that Abeinsa engaged in a pattern of falsifying information in the reports presented to the company’s external auditor, and that Abengoa intentionally ignored accounting principles to inflate profits in order to obtain hundreds of millions of dollars of financing, although the PTAC does not detail any specific instances recounted by FE2. See id. ¶¶ 77–78. FE2 resigned rather than sign off on false financial statements created to obtain capital for Abengoa. Id. ¶ 40.
d. FE3
“FE3” worked as a senior staff accountant at Abengoa’s corporate office in Missouri from June 2013 through July 2014. Id. ¶ 41. In that position, FE3 was responsible for accounting functions at Abeinsa, including with the preparation of weekly and monthly financial reports for Abengoa’s corporate headquarters in Spain and preparing and analyzing cash flow statements. Id. FE3 also confirmed the dual accounting system in place throughout Abengoa. Id. ¶ 79. In their role, FE3 received costs and revenues from Abeinsa’s various projects and entered those numbers into the SAP system; on a monthly basis, FE3 was required to ensure that the numbers in the SAP system precisely matched the numbers Abengoa’s executives had specified for ongoing projects. Id. ¶ 80. According to FE3, on some occasions, the revenue numbers in Abengoa’s internal accounting system were higher than the actual numbers booked in the external-facing SAP system. Id. ¶ 81. When that happened, FE3 was required to move costs
Like FE1, FE3 also claims that Abengoa maintained a purposely slow and cumbersome process for invoice approval, often stretching the problem for months at a time in order to preserve its cash flow. Id. ¶ 137. According to FE3, Abengoa required a process of up to six steps before an invoice could be forwarded to the department within the company responsible for approval. Id. If the invoice was rejected at any step, it was sent back to the vendor for resubmission, and the process started all over. Id. FE3 also states that Abengoa held on to approved invoices and would forward them to banks in a single package once a month, further delaying payment. Id.
Ultimately, in July 2014, FE3 resigned due to concerns about Abengoa’s financial reporting. Id. ¶ 41.
e. FE4
“FE4” worked for Abengoa entities from 1989 until retiring in March 2016, working specifically as the Chief of Critical Projects Follow-up for Inabensa between 2013 and 2014, and in the Controller Department from 2015 until his retirement. Doc. 144-1 ¶ 42. FE4 claims that, in his role in the Critical Projects Follow-up Department, project managers referred different issues to him. Id. In that role, FE4 discovered projects in the
SAP records that contained inaccurate cost-provision information, which was used to calculate project profits on a monthly basis, thereby projecting inaccurate income data. Id. ¶ 84. FE4 also explains that, separate from the SAP records, project managers used Excel files to manage projects, so that they could have their own figures on cost forecast, expected margin, and other data. Id. ¶ 85. According to FE4, some forecasts in Excel differed from those in SAP, especially for the expected final profit margin for a given project. Id. ¶ 86. That was so, according to FE4, because Inabensa would open each project in SAP with a specified profit margin, but it was difficult to obtain authority to lower the present project margins during the execution of the project. Id. As such, the external-facing project margin in SAP was reduced only at the end of the project, resulting in a need for regular follow-up on project records. Id. In response to these issues, in 2014, Inabensa‘s management authorized the development of software to properly follow up on projects, and in 2015, Simosa IT—again, Abengoa‘s IT subsidiary—purchased commercial software to oversee project follow-up for Abeinsa. Id. ¶ 87.
FE4 also claims that Abeinsa was able to recognize revenues prematurely through its accounting notes in SAP. Id. ¶ 89. Particularly when a project was awarded near the end of a financial year, the cost provisions for the project were entered immediately, despite the fact that purchase orders had not been issued and, in some cases, suppliers had not even been identified. Id. Specifically, FE4 corroborated FE7‘s account that, in 2013, two transmission line projects—one in Ukraine and the other in Kenya—had false cost provisions. Id. ¶ 90. Additionally, FE4 recalled two other projects with false cost provisions, noting one in Kuwait with more than €10 million in provisions. Id. FE4 claims that this abuse of cost provisions continued in 2015, but he does not know what happened after pre-bankruptcy was declared in November 2015. Id. According to FE4, Inabensa controlled these cost provisions through its Projects Control Department. Id. ¶ 91.
“FE5” worked as a communications engineer from 2007 to 2017 for Inabensa. Id. ¶ 43. In April 2015, FE5 was assigned to the Controller Department at Inabensa as a project control engineer for the AVE Meсca Medina project—a high-speed railway installation—in Saudi Arabia. Id. ¶¶ 43, 109. According to FE5, the Controller Department was created to control the correlation between the initial budget of a project and the subsequent costs that arose during the execution of that project. Id. ¶ 43. FE5 states that he was one of the first project control engineers at Abengoa, as the position had been created to investigate why the company‘s projects routinely maintained strong profit margins through the life of the project, but suddenly showed heavy losses once completed. Id. In this role, FE5 oversaw the budget of a project; to accomplish that task, FE5 compared the initial budget of a project to subsequent costs (incurred, committed, and pending) in order to evaluate the project‘s margins. Id. ¶¶ 43, 109.
During the course of his work on the AVE Mecca Medina project, FE5 discovered that expenses unrelated to the project—i.e., expenses from prior projects—had been charged to the project in 2012, 2013, and 2014, totaling approximately €22.2 million. Id. ¶¶ 92–93, 109, 112. For example, on December 31, 2012—the first day of the project—approximately €11.5 million was charged against it, despite the fact that the project had not yet incurred any expenses and did not have any outstanding orders or invoices. Id. ¶ 112. After further investigation, FE5 determined that these costs were in fact losses from other, unrelated projects involving Huawei, Vodafone, and Nokia. Id.
In November 2013, Inabensa Turkey, another Abengoa subsidiary, invoiced approximately €3.8 million of copper wire supplies to another Abengoa subsidiary, Inabensa Saudi, through the AVE Mecca Medina project; however, according to FE5, Inabensa Turkey was not involved with the project, and Inabensa Saudi did not need copper until 2014. Id. ¶ 132. In December 2014, when Inabensa Saudi finally needed the copper wire, it cancelled the invoice from Inabensa Turkey. Id. Additionally, FE5 discovered falsified invoices charged to the project on December 30 and 31, 2013. Id. ¶ 133. These invoices totaled approximately €7 million and were from Nicsa, an Abengoa subsidiary, for consulting, engineering, and supply services. Id. However, according to FE5, Nicsa had no role in the project, and another company had performed the engineering for the project. Id.
According to FE5, the practice of transferring unrelated expenses to new projects was widespread at Abengoa, as it was necessary to hide undeclared losses from prior projects, which in turn increased the percentage-of-completion of new projects and allowed Abengoa to recognize higher revenues. Id. ¶ 93. FE5 further explains that, if a new project was assigned losses from prior projects, the new project was ultimately unable to allocate its true expenses; consequently, these inherited costs would have to be attributed to another, newer project, essentially passing the buck on to future projects. Id. According to FE5, when Abengoa stopped winning new projects, it lost the ability to pass on losses from old to new projects, eventually leading to the collapse of the company. Id.
FE5 also states that senior management at Abengoa directed these transfers of unrelated project expenses, alleging that executives within Abengoa were incentivized to do so in order to earn bonuses. Id. ¶ 94. According to FE5, Abengoa based its executive bonuses on the percentage-of-completion of contracts and project margins,
FE5 also points to other methods Abengoa employed to inflate project margins. FE5 notes that, when he first started on the AVE Mecca Medina project, he attempted to obtain its initial budget but was unsuccessful, and was denied access to Inabensa‘s SAP accounting records. Id. ¶ 110. According to FE5, without the initial budget and all of the subsequent project costs, he was unable to calculate the actual margins for the project. Id. FE5 claims that, instead, two project managers instructed him to use a project margin of 21% and to modify costs in order to arrive at that calculation. Id. Additionally, the accounting records FE5 actually received uniformly contained a project margin of 21%. Id. ¶ 111. According to FE5, that level of uniformity was impossible, as the project involved varying prices over its lifetime, and he notes for example that the value of copper, gasoline, and foreign currency fluctuate with the market. Id. FE5 claims that this practice accordingly inflated the project margins, and Abengoa‘s directors implemented this practice to overstate a project‘s viability and to improve its percentage of completion, which in turn represented higher revenues for the company. Id.
According to FE5, Abengoa also delayed thе input of invoices into SAP—and at times reduced the amount of or did not input invoices into that accounting system. See id. ¶ 135. For example, FE5 found invoices that had been accepted in 2014 but had been altered to extend the payment deadlines for years, such that they were still payable in 2016 without being overdue. Id. Additionally, FE5 found an invoice for approximately nine million Saudi Riyals that was owed to a supplier but that had been recorded in the SAP as only one-to-two million Saudi Riyals, thereby inflating the appearance of Abengoa‘s cash flow. Id.
g. FE6
“FE6” has worked for Canalizaciones Ebro S.L. (“Cebro“) since 2010, and is currently the partner and sole administrator of the company. Id. ¶ 44. In that role, FE6 negotiated the terms of construction contracts that Cebro entered into, and dealt with representatives of Befesa—another subsidiary of Abengoa—in December 2011 and November 2012 in connection with Befesa‘s Cunene Water Pipeline project in Angola. Id. Specifically, Cebro was to construct 100km of pipeline for a water treatment plant being built in Angola. Id. According to FE6, Abengoa representatives instructed him to order equipment and supplies for the project that were not necessary, and to commence construction of the pipeline out of order, such that the pipeline would have to be reconstructed at a later date. Id. ¶¶ 44, 95. FE6 also states that, throughout the project, Cebro received requests from Befesa project managers for letters confirming those purchases. Id. ¶ 96. Additionally, FE6, who also processed work orders and invoices
FE6 claims that Abengoa ultimately failed to pay Cebro for its work on the project, resulting in Cebro filing civil and criminal complaints against Abengoa for unpaid invoices totaling approximately €1 million. Id. ¶¶ 44, 97, 113. According to FE6, Abengoa recorded that amount in project expenses between December 2011 and November 2012 despite not paying it. Id. ¶¶ 97, 113.
2. Other Investigations
Plaintiffs also rely on two reports and one Spanish regulatory decision in support of their allegations.
a. KPMG Report
Following Abengoa‘s bankruptcy, the new president of the company, Gonzalo Urquijo, commissioned KPMG to conduct a forensic analysis of the company for the years 2012 through 2016 (the “KPMG Report“).8 Id. ¶ 99. To conduct the investigation, KPMG reviewed Abengoa‘s internal emails and other internal documents. Id.
The KPMG Report found that Abeinsa fraudulently recorded an aggregated net amount of €15 million by artificially inflating project margins and by falsely advancing the percentages of completion of projects between 2012 and 2013. Id. ¶ 101. Additionally, the KPMG Report identified “intra-group invoices without economic substance charged against the AVE Mecca Medina project worth 6.1 million euros.” Id. ¶ 102 (alterations omitted). The report also found that Inabensa issued fake invoices in connection with two contracts awarded for that project for an amount of €153 million. Id.
Additionally, the KPMG Report included email exchanges in which Abengoa executives used one of its subsidiaries—Inabensa Turkey—to record costs that either had not yet occurred or would not occur. Id. ¶ 104. Those emails included Benjumea Llorente and Julio Artillo, Inabensa‘s former Administration Department Director. Id. ¶¶ 104–05. In one email, on August 10, 2012, Artillo suggested several other projects to record fake costs, and stated that he would speak with the individuals in charge of those projects to determine what costs they could take on. Id. ¶ 104. In a follow-up email on September 20, 2012, Artillo circulated а final list of projects that could be used in this scheme, stating that the proposed expenses would allow Inabensa to raise its profit margin for 2012 to €53 million; recipients of that email included Benjumea Llorente and senior managers of Abeinsa and Teyman, which was Abengoa‘s Uruguayan subsidiary. Id. ¶ 106. On September 21, 2012, Benjumea Llorente replied, authorizing the scheme, emphasizing its importance, and stating that “Everyone that is copied here must comply with my instructions.” Id. ¶ 107. Jose Dominguez Abascal—the general secretary of Abengoa at the time—was also included in this email. Id.
b. Audit by Silva & Asociados
In connection with the criminal proceedings in Spain, Silva & Asociados, an auditing firm, prepared an expert report for the National Court of Spain. Id. ¶ 185. According
c. ICAC Sanctions
On February 20, 2018, the Instituto de Contabilidad y Auditoria de Cuentas (the “ICAC“), a Spanish regulatory agency, sanctioned Abengoa‘s independent auditor and its lead partner in connection with an audit of Abengoa‘s 2014 financial statements. Id. ¶ 192. According to the ICAC‘s decision, the auditors did not verify the accuracy and reliability of income recorded in Abengoa‘s accounts from the company‘s engineering and construction activity for the 2014 financial year, nor did it verify the accuracy or reliability of Abengoa‘s project margin estimates or costs. Id. ¶¶ 193–94. Further, the ICAC also found that the auditors certified Abengoa‘s 2014 financial statements despite knowing that the statements contained material inaccuracies. Id. ¶ 194. The ICAC ultimately fined the auditors approximately €1.5 million. Id. ¶ 192.
3. Securities Act Claims
In support of their
We have successfully grown our business while seeking to enforce strict financial discipline to maintain our strong liquidity position. As of June 30, 2013, we had cash and cash equivalents and short-term financial investments of €3,222 million, which we believe are sufficient to satisfy our short-term liquidity needs. This strong cash position also assists in bidding for large projects.
Id. ¶ 197. Regarding the second category, Plaintiffs allege that the following statements were false and misleading:
Revenue from construction contracts is recognized using the percentage-of-completion method for contracts whose outcome can be reliably estimated and it is probable that they will be profitable.
. . .
[T]he percentage of completion is determined at the date of every consolidated statement of financial position based on the actual costs incurred as a percentage of total estimated costs for the entire contract.
. . .
We have established, over the years, a robust project management and control system, with periodic monitoring of each project. This system is based on the long-track experience of the Group in constructing complex infrastructures and installations. As far as practicable, we apply past experience in estimating the main elements of construction contracts and rely on objective data such as physical inspections or third party confirmations.
. . .
Costs incurred in the period which relate to future project activities are not included when determining the percentage of completion.
Id. ¶ 197 (emphases omitted).
Plaintiffs allege that these statements were inaccurate because prior to, during, and after the offering, Abengoa systematically
4. Exchange Act Claims
In support of their
II. LEGAL STANDARD
A. Rule 15(a)(2)
Pursuant to
Rule 9(b)
A complaint alleging securities fraud must satisfy the heightened pleading requirements of
Specifically,
These heightened pleading standards, when viewed together with the more general standards applicable to
III. DISCUSSION
Abengoa, Sanchez Ortega, and the Underwriter Defendants each submit their own motion and incorporate by reference the arguments of the other movants. Together, Defendants challenge the PTAC as unduly delayed, brought in bad faith, and unduly prejudicial; however, the Court notes that, while Sanchez Ortega fully briefs the issue of futility, Abengoa and the Underwriter Defendants only briefly discuss that issue, stating that instead they intend to fully address it in a motion to dismiss should the Court grant Plaintiffs leave to amend their complaint. Docs. 148 at 5–6 and 150 at 3. Because it is the burden of the non-movant to establish futility, Ithaca Cap., 450 F. Supp. 3d at 377, and Abengoa and the Underwriter Defendants have explicitly reserved that issue for a motion to dismiss, the Court analyzes futility as to only Sanchez Ortega.
The Court first turns to the issues fully addressed by all of the defendants—namely, undue delay and bad faith, and undue prejudice—before turning to the arguments that are specific to Sanchez Ortega.
A. Undue Delay and Bad Faith
Defendants argue that Plaintiffs should be denied leave to amend because they have unduly delayed bringing the allegations
In this Circuit, mere delay, “absent a showing of bad faith or undue prejudice, does not provide a basis for a district court to deny the right to amend.” Contrera v. Langer, 314 F. Supp. 3d 562, 566 (S.D.N.Y. 2018) (quoting State Tchrs. Ret. Bd. v. Fluor Corp., 654 F.2d 843, 856 (2d Cir. 1981)). Although the party seeking to amend its pleading must explain its delay, Park B. Smith, Inc. v. CHF Indus. Inc., 811 F. Supp. 2d 766, 779 (S.D.N.Y. 2011), the party opposing the amendment carries the burden of showing undue prejudice or bad faith, Contrera, 314 F. Supp. 3d at 567. In opposing a motion for leave to amend a complaint, “[s]imply alleging that the plaintiff could have moved to amend earlier than she did . . . is insufficient to demonstrate undue delay.” Agerbrink, 155 F. Supp. 3d at 452; see also Richardson Greenshields Sec., Inc. v. Lau, 825 F.2d 647, 653 n.6 (2d Cir. 1987) (collecting cases where courts granted leave to amend after delays ranging from two to five years). Relatedly, a court will not deny a motion to amend simply because a plaintiff now “alle[ges] facts that were previously within [its] knowledge.” Bodum Holding AG v. Starbucks Corp., No. 19 Civ. 4280 (ER), 2020 WL 6135714, at *9 (S.D.N.Y. Oct. 16, 2020) (quoting Dilworth v. Goldberg, 914 F. Supp. 2d 433, 460 (S.D.N.Y. 2012)); see also Agerbrink, 155 F. Supp. 3d at 452–53. Indeed, courts in this District have noted that a party “need not prove that [it] uncovered new facts or law in order for [a court] to grant leave to amend.” Affiliated FM Ins. Co. v. Liberty Mech. Contractors, Inc., No. 12 Civ. 5160 (KPF), 2013 WL 4526246, at *5 (S.D.N.Y. Aug. 27, 2013) (collecting cases).
The Court concludes that the PTAC is neither unduly delayed nor brought in bad faith. Plaintiffs dispute the extent to which they had previously known the allegations that they have added in the PTAC, noting that most of the new information upon which they rely was available only after the Spanish National Court issued an order on February 3, 2020 referencing that information. But that dispute is immaterial. Even if Plaintiffs had known—or at least, could have uncovered—the new allegations prior to filing their previous iteration of the complaint, the Court concludes that Plaintiffs have met thеir burden in providing a satisfactory explanation for their delay.
As Plaintiffs argue, the Court‘s August 21, 2020 Order was the first time they became aware of the deficiencies in their Second Amended Complaint, and under the principles outlined in Loreley Financing (Jersey) No. 3 Ltd. v. Wells Fargo Securities, LLC, 797 F.3d 160 (2d Cir. 2015), and its progeny, they are entitled to leave to amend. As the Second Circuit emphasized in Loreley, “[w]ithout the benefit of a ruling, many a plaintiff will not see the necessity of amendment or be in a position to weigh the practicality and possible means of curing specific deficiencies.” Id. at 190. Accordingly, “[t]he proper time for a plaintiff to move to amend the complaint is when the plaintiff learns from the District Court in what respect the complaint is deficient,” as “[b]efore learning from the court what are its deficiencies, the plaintiff cannot know whether he is capable of amending the complaint efficaciously.” Cresci v. Mohawk Valley Cmty. Coll., 693 F. App‘x 21, 25 (2d Cir. 2017) (summary order). As such, courts in this District have ordinarily granted a plaintiff “leave to amend at least once after having the benefit of a court‘s reasoning in dismissing the complaint.” See Obra Pia Ltd. v. Seagrape Invs. LLC, No. 19 Civ. 7840 (RA), 2021 WL 1978545, at *3 (S.D.N.Y. May 18, 2021); see also Attestor Value Master Fund v. Republic of Argentina, 940 F.3d 825, 833 (2d Cir. 2019).
Defendants push back that, here, their motions to dismiss put Plaintiffs on notice of the deficiencies in the Second Amended Complaint, and Plaintiffs therefore had ample opportunity to amend their complaint before the Court‘s resolution of their motions. But as the Second Circuit has emphasized, “[i]t is the District Court‘s ruling, not the defendant‘s arguments in support of a motion to dismiss, that puts a plaintiff on notice of the complaint‘s deficiencies.” Cresci, 693 F. App‘x at 25. Because under Loreley and its progeny, Plaintiffs lacked notice of the deficiencies in their Second Amended Complaint until the Court‘s August 21, 2020 Order, they were unable to efficaciously amend the complaint prior to that time. Accordingly, the Court concludes that Plaintiffs have provided a satisfactory explanation for any delay. See Kairam v. W. Side GI, LLC, 793 F. App‘x. 23, 28 (2d Cir. 2019) (summary order) (holding that leave to amend should be granted where рlaintiff had already amended complaint twice but had “not yet done so with the benefit of a ruling“).
From there, Defendants bear the burden of showing that the delay occurred because of dilatory motive or bad faith. Contrera, 314 F. Supp. 3d at 567. But again, Defendants assert merely that Plaintiffs could have uncovered information in the new allegations sooner and could have brought these allegations before the instant motion. Courts in this Circuit routinely reject either basis for a finding of bad faith, even when several years have passed since the complaint was originally filed. See Bodum, 2020 WL 6135714, at *9; see also Agerbrink, 155 F. Supp. 3d at 452–54; Dilworth, 914 F. Supp. 2d at 460. Moreover, Plaintiffs filed the instant motion for leave to amend by the deadline the Court set in its August 21, 2020 Order, indicating that they did not seek to draw out their request once they were apprised of the deficiencies in their pleading. Accordingly, the Court concludes that Plaintiffs’ PTAC is not unduly delayed nor brought in bad faith.
B. Undue Prejudice
Defendants also argue that they will be unduly prejudiced by the PTAC, asserting that Plaintiffs predicate their claims on several factual allegations that have never appeared before in this case, effectively rendering the matter an entirely new lawsuit. Moreover, those allegations relate to projects and transactions that stretch back to at least 2012, and Defendants contend that their ability to assemble evidence will be severely hampered due to fading memories and relevant witnesses no longer being available. Relatedly, Defendants note that, since this suit began, Abengoa has
Denying leave to amend a complaint requires not just prejudice but undue prejudice. Agerbrink, 155 F. Supp. 3d at 454. The defendant bears the burden of showing that undue prejudice would result from granting leave to amend. Id. To determine whether а defendant is unduly prejudiced by an amended complaint, a court must consider whether the proposed amendment “would ‘(i) require the opponent to expend significant additional resources to conduct discovery and prepare for trial; (ii) significantly delay the resolution of the dispute; or (iii) prevent the plaintiff from bringing a timely action in another jurisdiction.‘” Id. (quoting Monahan v. N.Y.C. Dep‘t of Corr., 214 F.3d 275, 284 (2d Cir. 2000)). Additionally, courts consider the procedural posture of the case in determining whether an amendment is prejudicial. Id. at 454–55 (finding defendant was not unduly prejudiced where plaintiff sought leave to amend before close of discovery); see also Bodum, 2020 WL 6135714, at *9. Notably, the prospect of spending more time, effort, or money on litigation—including through additional discovery and motion practice—does not render an amended complaint unduly prejudicial. Agerbrink, 155 F. Supp. 3d at 455; see also Block v. First Blood Assocs., 988 F.2d 344, 351 (2d Cir. 1993) (granting leave where defendants argued prejudice resulted “solely because of the time, effort and money they expended in litigating this matter“). That is especially so where the defendant has been on notice of the substance of and theories underlying the plaintiff‘s claims. See Bodum, 2020 WL 6135714, at *10.
The Court concludes that Defendants are not unduly prejudiced by the amendment. As an initial matter, the Court notes that Defendants seem to contradict their position regarding undue delay: whereas Defendants assert that Plaintiffs have unduly delayed bringing allegations that had previously been known or were accessible to the public—and therefore, Defendants were on notice, too—they also argue that they will be unduly prejudiced because Plaintiffs allege a plethora of new allegations. In any event, as Plaintiffs note, although now incorporating several new factual allegations to address the deficiencies identified by the Court‘s August 21, 2020 Order, the PTAC still asserts the same causes of action and relies on the same alleged misstatements, names the same Defendants, focuses on the sаme Class Period, and puts forth the same theory of scienter as the Second Amended Complaint did. Thus, contrary to Defendants’ assertion, Plaintiffs have not brought an entirely new lawsuit through the PTAC, but instead have responded to the Court‘s August 21, 2020 Order to support the claims they had already brought. See Agerbrink, 155 F. Supp. 3d at 455–56; Bodum, 2020 WL 6135714, at *10; see also Loreley, 797 F.3d at 190. Further, although Defendants are likely correct that they will experience some hardship from the passage of time and the increased expenses related to discovery, those factors are not sufficient to constitute undue prejudice—especially where, as here, discovery has not even commenced. See Agerbrink, 155 F. Supp. 3d at 454; Bodum, 2020 WL 6135714, at *9–10. That is especially true where, as here, the
Accordingly, the Court concludes that the PTAC does not unduly prejudice Defendants. Because Abengoa and the Underwriter Defendants do not otherwise contest the PTAC at this juncture, Plaintiffs’ motion is granted as to those defendants, with the exception of any claims against Banco Santander.9
C. Futility of Claims Against Sanchez Ortega
1. Standard for Futility
The Second Circuit has held that leave to amend may be denied based on futility when it is “beyond doubt that the plaintiff can prove no set of facts in support of [its] amended claims.” Pangburn v. Culbertson, 200 F.3d 65, 71 (2d Cir. 1999) (quotation omitted). The non-moving party bears the burden of establishing the amendment‘s futility. Ithaca Cap., 450 F. Supp. 3d at 377. To determine whether a proposed pleading is futile, courts analyze whether it would withstand a motion to dismiss pursuant to
To survive a motion to dismiss pursuant to
The question on a motion to dismiss “is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.” Sikhs for Just. v. Nath, 893 F. Supp. 2d 598, 615 (S.D.N.Y 2012) (quoting Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 368 (2d Cir. 1995)). Indeed, “the purpose of
Accordingly, when considering a motion to amend a pleading, a “court must accept as true all well-pleaded facts and draw all reasonable inferences in the moving party‘s favor.” Agerbrink, 155 F. Supp. 3d at 456.
2. Exchange Act Claims
In the PTAC, Plaintiffs bring claims against Sanchez Ortega for violations of
a. Section 10(b) and SEC Rule 10b-5
(a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
Sanchez Ortega argues that Plaintiffs fail to state a claim for a violation of the
scienter at least as strong as any opposing inference?’ If so, then scienter has been adequately pleaded. If not, the case may be dismissed.” Medis, 586 F. Supp. 2d at 141 (quoting Tellabs, 551 U.S. at 326).
First, Sanchez Ortega argues that the PTAC fails to allege that he acted with motive and opportunity. “A complaint has sufficiently alleged ‘motive and opportunity to commit fraud’ if it pleads facts showing that the defendant ‘benefited in some concrete and personal way from the purported fraud.’” Van Dongen v. CNinsure Inc., 951 F. Supp. 2d 457, 468 (S.D.N.Y. 2013) (quoting Novak v. Kasaks, 216 F.3d 300, 307–08 (2d Cir. 2000)). While “[t]he opportunity to commit fraud is generally assumed where the defendant is a corporation or corporate officer,” id. (collecting cases), general motives common to most corporate officers do not constitute “motive” for the purpose of establishing scienter, ECA, 553 F.3d at 198. Therefore, the desire for the corporation to appear profitable and the desire to keep stock prices high to increase officer compensation do not suffice to establish a motive. See Abengoa, 481 F. Supp. 3d at 213; see also Van Dongen, 951 F. Supp. 2d at 468 (citing Kalnit, 264 F.3d at 139).
More specifically, Sanchez Ortega argues that Plaintiffs have failed to cure any of the defects identified in the Court’s August 21, 2020 Order. In dismissing the Second Amended Complaint, the Court held that Plaintiffs failed to establish that Sanchez Ortega had the motive to commit fraud, emphasizing that Plaintiffs failed to allege that Sanchez Ortega himself received аny concrete and personal benefit from his behavior and noting that Plaintiffs had not alleged that he had sold a single share of his own Abengoa stock or ADS. Abengoa, 481 F. Supp. 3d at 213. Sanchez Ortega notes that the PTAC still fails to allege that he sold any shares of his own Abengoa stock or ADS during the Class Period, and asserts that the only new allegation related to motive is that he potentially stood to gain bonuses due to the alleged fraud, as bonuses for management were tied to project profitability. In their reply, Plaintiffs do not attempt to refute these arguments, and instead assert that they have sufficiently alleged facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.
Where, as here, a plaintiff fails to allege a motive to commit fraud, the plaintiff’s allegations that indicate a defendant’s conscious misbehavior or recklessness “must be correspondingly greater.” Kalnit, 264 F.3d at 142 (quotation omitted); see also Abengoa, 481 F. Supp. 3d at 213. In order to establish scienter under the conscious misbehavior or recklessness theory, Plaintiffs “must show conduct by defendants that is at the least highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.” In re Initial Pub. Offering Sec. Litig., 358 F. Supp. 2d 189, 216 (S.D.N.Y. 2004) (internal quotation marks omitted) (quoting Kalnit, 264 F.3d at 142); see also Abengoa, 481 F. Supp. 3d at 213. To the extent that plaintiffs assert that defendants had access to contrary facts, the complaint must “specifically identify the reports or statements containing that information.” In re Gen. Elec. Co. Sec. Litig., 856 F. Supp. 2d 645, 659 (S.D.N.Y. 2012) (quotation omitted). “Recklessness in the scienter context[, however,] cannot be merely enhanced negligence.” In re JP Morgan Chase Sec. Litig., 363 F. Supp. 2d 595, 624 (S.D.N.Y. 2005); Medis, 586 F. Supp. 2d at 142 (“To properly allege recklessness, the plaintiff must plead a state of mind approximating actual intent, and not merely a heightened form of negligence.” (quotation omitted)). Moreover,
unlike statements about historical facts, in which the scienter inquiry focuses on whether the defendants “knew facts or had access to information suggesting that their public statements were not accurate” or “failed to check information they had a duty to monitor,” the recklessness inquiry as to forward-looking projections focuses on whether the defendants knew at the time they made these projections that they were unrealistic or unlikely to come true.
City of Austin Police Ret. Sys. v. Kinross Gold Corp., 957 F. Supp. 2d 277, 301 (S.D.N.Y. 2013) (quoting ECA, 553 F.3d at 199).
Sanchez Ortega argues that Plaintiffs fail to sufficiently allege conscious misbehavior or recklessness. First, Sanchez Ortega emphasizes that, while Plaintiffs allege that Benjumea Llorente directed senior managers to comply with his instructions regarding recording false costs, Plaintiffs fail to allege that Sanchez Ortega received that specific email or was a part of the other alleged email chains. Second, to the extent that Plaintiffs rely on the Spanish criminal proceedings, Sanchez Ortega notes that those proceedings are still in the preliminary investigative stage, which Plaintiffs acknowledge in the PTAC. Accordingly, just as the Court declined to assume the truth of the allegations in those proceedings in its August 21, 2020 Order, it should again decline to conclude that the existence of a criminal proceeding is sufficient to give rise to a requisite
The Court agrees with Sanchez Ortega. As an initial matter, the Court notes that it does not rely on the fact that there are criminal proceedings in Spain to infer scienter. Because Plaintiffs acknowledge that those proceedings are still in their investigatory stage, the Court declines to infer scienter from the existence of those proceedings—just as it did in its August 21, 2020 Order. Abengoa, 481 F. Supp. 3d at 214; see also Lipow v. Net1 UEPS Techs., Inc., 131 F. Supp. 3d 144, 164 (S.D.N.Y. 2015). Even аssuming that the Court could rely on all of the confidential witness statements,11 those accounts are not sufficient
In other words, Plaintiffs rely on the “core operations” doctrine. Under that doctrine, “if a plaintiff can plead that a defendant made false or misleading statements when contradictory facts of critical importance to the company either were apparent, or should have been apparent, an inference arises that high-level officers and directors had knowledge of those facts by virtue of their positions with the company.” In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F. Supp. 2d 474, 489 (S.D.N.Y. 2004); see also Schwab v. E*TRADE Fin. Corp., 258 F. Supp. 3d 418, 434 (S.D.N.Y. 2017). “In other words, this doctrine allows courts to draw an inference of scienter where misrepresentations and omissions allegedly made by defendants were about their core operations.” City of Omaha Police & Fire Ret. Sys. v. Evoqua Water Techs. Corp., 450 F. Supp. 3d 379, 423 (S.D.N.Y. 2020). The Second Circuit has not expressly determined if the “core operations” doctrine remains applicable to provide scienter after the enactment of the PSLRA. See Frederick v. Mechel OAO, 475 F. App’x 353, 356 & n.5 (2d Cir. 2012) (summary order). However, the Second Circuit has suggested that the doctrine can provide additional support for an inference of scienter, even if it cannot establish scienter on its own. See City of Omaha, 450 F. Supp. 3d at 424. The majority of courts in this Circuit—including this one—have adopted this approach. See id. (collecting cases); see also In re Kandi Techs. Grp., Inc. Sec. Litig., No. 17 Civ. 1944 (ER), 2019 WL 4918649, at *7–8 (S.D.N.Y. Oct. 4, 2019). Moreover, in deciding whether to apply the core operations doctrine, courts in this District have required that the operation at issue make up nearly all of a company’s business or be essential to its survival. See Kandi, 2019 WL 4918649, at *7.
Even assuming, arguendo, that approximately 60% of Abengoa’s consolidated sales constitutes enough to invoke the core operations doctrine, see id. at *8, the Court finds Plaintiffs’ allegations insufficient, on the basis of the core operations doctrine alone, to establish scienter on behalf of Sanchez Ortega. Although the importance of Abeinsa’s and Inabensa’s transactions should have strengthened Sanchez Ortega’s awareness of any specific contradictory fact or information, they could not substitute specific factual allegations linking him to the alleged accounting
Of course, in determining whether Plaintiffs have adequately established scienter, “[t]he Court is mindful of its obligation to consider ‘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.’” Id. at *11 (quoting Tellabs, 551 U.S. at 323). But Plaintiffs’ allegations fall short both individually and collectively.
Regarding Sanchez Ortega’s resignation, as the Court emphasized in its August 21, 2020 Order, although “[r]esignations аccompanied by suspicious circumstances may bolster the inference of scienter, . . . plaintiffs must also allege ‘a factual basis to conclude that the resignation was tied to participation in or knowledge of the fraud.’” Abengoa, 481 F. Supp. 3d at 214 (quoting Schiro, 396 F. Supp. 3d at 303); see also Glaser v. The9, Ltd., 772 F. Supp. 2d 573, 598 (S.D.N.Y. 2011) (collecting cases). “Put differently, a resignation can establish scienter only if the plaintiff alleges independent evidence corroborating that the employee who resigned held a culpable state of mind. Standing alone, however, an employee’s resignation does not raise a strong inference of scienter.” Schiro, 396 F. Supp. 3d at 303 (citations omitted). As with the Second Amended Complaint, the PTAC pleads no such facts, stating only that Sanchez Ortega abruptly resigned following the revelation of Abengoa’s leverage ratios and amidst tightening internal financial controls. See Glaser, 772 F. Supp. 2d at 598.
Nor do the Sarbanes-Oxley certifications establish scienter. Of course, courts have determined that signing Sarbanes-Oxley certifications might be indicative of scienter. Das v. Rio Tinto PLC, 332 F. Supp. 3d 786, 816 (S.D.N.Y. 2018). However, a plaintiff “cannot raise an inference of fraudulent intent based on the signing of a certification without alleging any facts to show a concomitant awareness of or recklessness to the materially misleading nature of the statements.” Plumbers & Pipefitters Nat’l Pension Fund v. Orthofix Int’l N.V., 89 F. Supp. 3d 602, 615 (S.D.N.Y. 2015) (collecting cases). And where, as here, the complaint does not adequately allege that the defendant had actual knowledge of the alleged fraud, it undermines the allegations that he knew that the certifications were false. See Menaldi v. Och-Ziff Cap. Mgmt. Grp. LLC, 277 F. Supp. 3d 500, 517 (S.D.N.Y. 2017). Accordingly, the Sarbanes-Oxley certifications do not support an inference of scienter as to Sanchez Ortega.
Therefore, Plaintiffs’ allegations, viewed collectively, do not support a strong inference of scienter for Sanchez Ortega. Tellabs, 551 U.S. at 314. Because failure to plead a strong inference of scienter alone is a sufficient basis for dismissal, the Court concludes that Plaintiffs’ claim pursuant to Section 10 and
b. Section 20(a)
Even assuming that Plaintiffs have sufficiently alleged a section 10 claim against Abengoa and the Underwriter Defendants, Plaintiffs have failed to plead scienter as to Sanchez Ortega, as discussed above. Accordingly, Plaintiffs have failed to state a claim that Sanchez Ortega was a culpable participant pursuant to section 20(a).
3. Securities Act Claims
In the PTAC, Plaintiffs bring claims pursuant to sections 11 and 15 of the Securities Act against Sanchez Ortega.
“Section 11 of the Securities Act prohibits materially misleading statements or omissions in registration statements filed with the SEC.” In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 358 (2d Cir. 2010). Section 11 “creates a right of action for ‘any person’ who acquired a security offered pursuant to a misleading registration statement.” City of Omaha, 450 F. Supp. 3d at 400 (quoting
Section 15 of the Securities Act imposes joint and several liability on “[e]very person who, by or through stock ownership, agency, or otherwise . . . controls any person liable under” section 11. In re Lehman Bros. Mortg.-Backed Sec. Litig., 650 F.3d 167, 185 (2d Cir. 2011) (citing
Sanchez Ortega argues only that Plaintiffs’ claims pursuant to the Securities Act should be dismissed because they fail to adequately allege scienter. Doc. 147 at 15–16. Because those claims do not require a showing of scienter, and Sanchez Ortega has not otherwise addressed futility, Plaintiffs’ motion is granted as to their claims pursuant to the Securities Act.
IV. CONCLUSION
For the foregoing reasons, Plaintiffs’ motion is GRANTED in part and DENIED in part. Specifically, Plaintiffs’ motion is granted as to all claims except their claims against Sanchez Ortega pursuant to (1) section 10 and
It is SO ORDERED.
Dated: September 10, 2021
New York, New York
EDGARDO RAMOS, U.S.D.J.