The above referenced securities-fraud, putative class action alleges material misrepresentations and omissions by Defendants regarding Key Energy Services, Inc.’s (“Key’s”) financial condition and the future of its business, leading to inflated stock prices in violation of §§ 10(b), control person liability under 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j(b) and 78t(a), as amended by the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), 15 U.S.C. § 78u-4(b)(2), et seq., Securities and Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5, and by the Foreign Corrupt Practices Act of 1977 (the “FCPA”), 15 U.S.C. § 78dd-1, et al., by overstatement of lucrative business opportunities in foreign countries despite significant, highly publicized risks, particularly in Mexico and Russia, and by failure to disclose serious deficiencies in Key’s internal control systems to protect Key from the threat of FCPA violations and to attract and maintain investor interest in Key’s business operations in areas known for corruption.
Pending before the Court are two motions to dismiss the Consolidated Amended Complaint (instrument #37) of Lead Plaintiff Inter-Local Pension Fund of the Graphic Communications of the International Brotherhood of Teamsters, pursuant to the PSLRA and Federal Rules of Civil Procedure 9(b) and 12(b)(6), filed by (1) Defendants Key Energy Services, Inc. (“Key”),
This action is brought on behalf of a putative class composed of all persons and entities, excluding Defendants and their affiliates, who or which purchased or acquired Key’s common stock from September 4, 2012 to July 17, 2014 (the “Class Period”).
A. Rule 12(b)(6)
When a district court reviews a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), it must construe the complaint in favor of the plaintiff and take all well-pleaded facts as true. Randall D. Wolcott, MD, PA v. Sebelius,
“While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ... a plaintiffs obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.... ” Bell Atlantic Corp. v. Twombly,
In Ashcroft v. Iqbal,
Dismissal under Rule 12(b)(6) is proper not only where the plaintiff fails to plead sufficient facts to support a cognizable legal theory, but also where the plaintiff fails to allege a cognizable legal theory. Kjellvander v. Citicorp,
When a plaintiffs complaint fails to state a claim, the court should generally give the plaintiff at least one chance to amend the complaint under Rule 15(a) before dismissing the action with prejudice. Great Plains Trust Co v. Morgan Stanley Dean Witter & Co.,
“Rule 12(b) is not a procedure for resolving contests about the facts or the merits of a case.” Gallentine v. Housing Authority of City of Port Arthur, Tex.,
As noted, on a Rule 12(b)(6) review, although generally the court may not look beyond the pleadings, the Court may examine the complaint, documents attached to the complaint, and documents attached to the motion to dismiss to which the complaint refers and which are central to the plaintiffs claim(s), as well as matters of public record. Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC,
B. Rule 9(b)
Federal Rule of Civil Procedure 9(b) provides,
In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person must be averred generally.
“In every case based upon fraud, Rule 9(b) requires the plaintiff to allege as to each individual defendant ‘the nature of the fraud, some details, a brief sketch of how the fraudulent scheme operated, when and where it occurred, and the participants.” Hernandez v. Ciba-Geigy Corp. USA,
Unlike the alleged fraud, Rule 9(b) allows a plaintiff to plead intent to deceive or defraud generally. Nevertheless a mere conclusory statement that the defendant had the required intent is insufficient; the plaintiff must set forth specific facts that raise an inference of fraudulent intent, for example, facts that show the defendant’s motive. Tuchman v. DSC Communications Corp.,
The particularity requirement of Rule 9(b) also governs a conspiracy to commit fraud. Southwest Louisiana Healthcare System v. MBIA Ins. Corp., No. 05-1299,
The Fifth Circuit, although construing Rule 9(b) strictly, has recognized an exception and permits the requirements to be “relaxed” where facts relating to the fraud are “peculiarly within the perpetrator’s knowledge”; then the alleged fraud “may be pled on information and belief, provided the plaintiff sets forth the factual basis for his belief.” United States ex rel. Russell v. Epic Healthcare Management Group,
A dismissal for failure to plead with particularity in accordance with Rule 9(b) is treated as a Rule 12(b)(6) dismissal for failure to state a claim. Lovelace v. Software Spectrum, Inc.,
The PSLRA heightened the particularity requirements to plead securities fraud in two ways: (1) the plaintiff must “specify each statement alleged to have been misleading and the reason or reasons why the statement is misleading...,” 15 U.S.C. § 78u-4(B)(l)(B); and (2) for “each act or omission alleged” to be false or misleading, the plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind,” 15 U.S.C. § 78u-4(b)(2). Indiana Elec. Workers’ Pension Trust Fund IBEW v. Shaw Group, Inc.,
The Fifth Circuit does not permit group pleading in securities fraud suits. Owens v. Jastrow,
II. Relevant Substantive Law
Exchange Act and the PSLRA
“[T]o state a claim under section 10(b) of the 1934 [Exchange] Act and Rule 10b-5, a plaintiff must allege, in connection
In any private action arising under this chapter in which the plaintiff alleges that the defendant-
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading;
the complaint shall specify each statement alleged to have been misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all the facts on which that belief is formed.
See, e.g., ABC Arbitrage Plaintiffs Group v. Tchuruk,
An untrue statement is “material” under section 10(b) of the Exchange Act and Rule 10b-5
For the “made with scienter” requirement, the PSLRA, 15 U.S.C. § 78u-4(b)(2), states, “In any private action under this chapter in which the plaintiff may recover money damages on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Nathenson,
In rejecting the Second Circuit’s “motive and opportunity” pleading standard, the Fifth Circuit has concluded, “What must be alleged is not motive and opportunity as such, but particularized facts giving rise to a strong inference of scienter. Appropriate allegations of motive and opportunity may meaningfully enhance the strength of the inference of scienter, but it would seem to be a rare set of circumstances indeed where those allegations alone are both sufficiently persuasive to give rise to a scienter inference of the necessary strength and yet at the same time there is no basis for further allegations also supportive of that inference.” Id. at 412. In evaluating whether pleaded facts give rise to a strong (i.e., “a powerful or cogent”) inference of scienter, the court must “assess all the allegations holistically,” following a three-step procedure “geared to the PSLRA’s twin goals: to curb frivolous, lawyer-driven litigation, while preserving investors’ ability to recover on meritorious claims.” Tellabs, Inc. v. Makor Issues & Rights,
The Fifth Circuit has held that “ ‘pleading[s] of scienter may not rest on the inference that defendants must have been aware of the misstatement based on their positions with the company.’ ” Shaw Group,
If the plaintiff fails to satisfy this scienter requirement, the district court “ ‘shall,” on defendant’s motion, ‘dismiss the complaint.’ ” Id. at 407, citing § 78u-4(b)(3).
Finally, regarding the reliance element in section 10(b) of the Exchange Act and Rule 10b-5, the Fifth Circuit opined in Abell v. Potomac Ins. Co.,
“The element of reliance is the subjective counterpart to the objective elementof materiality. Whereas materiality requires the plaintiff to demonstrate how a ‘reasonable’ investor would have viewed the defendants’ statements and omissions, reliance requires a plaintiff to prove that it actually based its decisions upon the defendants’ misstatements or omissions. ‘Reliance is causa sine qua non, a type of “but for” requirement: had the investor known the truth he would not have acted.” Huddleston [v. Herman and MacLean, 640 F.2d 534 [, 549] (5th Cir.1981), rev’d in part on other grounds,459 U.S. 375 ,103 S.Ct. 683 ,74 L.Ed.2d 548 (1983).
Nathenson,
Because the Supreme Court determined that requiring direct proof of individualized reliance “would place an unnecessarily unrealistic evidentiary burden on [a] plaintiff who has traded in an impersonal market,” and “effectively would” prevent plaintiffs “from proceeding with a class action” under Rule 23(b)(3), in Basic, Inc.,
“The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business .... Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements.... The causal connection between the defendants’ fraud and the plaintiffs’ purchase of stock in such a case is no less significant than a case of direct reliance on misrepresentations.” Peil v. Speiser,806 F.2d 1154 , 1160-61 (CA3 1986).
Id. at 989. See also Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, — U.S. —,
Under the PSLRA plaintiffs bear the burden of showing that the defendants’ act or omission caused the economic loss for which plaintiffs seek to recover damages. 15 U.S.C. § 78u-4(b)(4). Under Rule 10b-5 Plaintiffs must allege proximate causation as well as economic loss. Dura Phamn., Inc. v. Broudo,
The Fifth Circuit has opined that under Dura Pharmaceuticals and Twombly, the plausibility standard in Rule 8(a) would apply to pleading causation and economic loss. Public Employees Retirement System of Mississippi, Puerto Rico Teachers Retirement System v. Amedisys, Inc.,
[T]he plaintiff must allege that when the ‘relevant truth’ about the fraud began to leak out or otherwise make its way into the marketplace, it caused the price of the stock to depreciate, and, thereby, proximately caused the plaintiffs economic harm. Loss causation in fraud-on-the-market cases can be demonstrated circumstantially by ’(1) identifying a ‘corrective disclosure’ (a release of information that reveals to the market the pertinent truth that was previously concealed or obscured by the company’s fraud); (2) showing that the stock price dropped soon after the corrective disclosure; and (3) eliminating other possible explanations for this price drop, so that the fact finder can infer that it is more probable than not that it was the corrective disclosure — as opposed to other possible depressive factors — that caused at least a ‘substantial’ amount of price drop.”
Id. at 320-21, quoting FindWhat Investor Group v. FindWhat.com,
As to the requirement that an allegation of a statement or omission “made on information and belief’ requires that the complaint “state with particularity all facts on which that belief is formed,” the Fifth Circuit adopts the Second Circuit’s interpretation in Novak v. Kasaks,
“More fundamentally, our reading of the PSLRA rejects any notion that confidential sources must be named as a general matter. In our view, notwithstanding the use of the word, ‘all,’ paragraph (b)(1) does not require that plaintiffs plead with particularity every single fact upon which their beliefs concerning false or misleading statements are based. Rather, plaintiff need only plead with particularity sufficient facts to support those beliefs. Accordingly, where plaintiffs rely on confidential personal sources but also on other facts, they need not name their sources as long as the latter facts provide an adequate basis for believing that the defendants’ statements were false. Moreover, even if personal sources must be identified, there is no requirement that they be named, provided they are described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged. In both these situations, the plaintiffs will have pleaded enough facts to support their belief, even though some arguably relevant fact have been left out. Accordingly, a complaint can meet the new pleading requirement imposed by paragraph (b)(1) by providing documentary evidence and/or a sufficient general description of the personal sources of the plaintiffs’ beliefs.”
ABC Arbitrage,
“Paragraph (b)(1) is strangely drafted. Reading ‘all’ literally would produce illogical results that Congress cannot have intended. Contrary to the clearly expressed purpose of the PSLRA, it would allow complaints to survive dismissal where ‘all’ the facts supporting the plaintiffs information and belief were pled, but those facts were patently insufficient to support that belief. Equally peculiarly, it would require dismissal where the complaint pled facts fully sufficient to support a convincing inference if any known facts were omitted. Our reading of the provision focuses on whether the facts alleged are sufficient to support a reasonable belief as to the misleading nature of the statement or omission.”
The “other facts” can be documentary evidence (for which the plaintiff specifies the internal report(s), the person(s) who prepared them, when, which company officer reviewed them) that “provide[s] an adequate basis for believing that the defendants’ statement or omissions were false or misleading” or “descriptions of personal sources” with sufficient particularity “to support the probability that a person in the position occupied by the source would possess the information pleaded to support the allegations of false or misleading statements made on information and belief.” Id. at 353. Therefore only “if the other facts, i.e., do not provide an adequate basis for believing that the defendants’ statements were false and the descriptions of the personal sources are not sufficiently particular to support the probability that a person in the position occupied by the source would possess the information pleaded to support the allegations of false or misleading statements made on information and belief,” must the complaint name personal sources.
Nevertheless in the wake of Tellabs,
Following Tellabs, courts must discount allegations from confidential sources. Higginbotham v. Baxter Int’l Inc.,495 F.3d 753 , 756-57 (7th Cir.2007).11 Such [confidential] sources afford no basis for drawing the plausible competing inferences required by Tellabs. Id. at 757 (“Tellabs requires judges to weigh the strength of plaintiffs’ favored inference in comparison to other possible inferences; anonymity frustrates that process.”). At the very least, such sources must be described “with sufficient particularity to support the probability that a person in the position occupied by the source ... would possess the information pleaded_” ABC Arbitrage Plaintiffs Group v. Tchuruk,291 F.3d 336 , 353 (5th Cir.2002); see also Central Laborers’ [Pension Fund v. Integrated Elec. Services, Inc.], 497 F.3d [546,] 552 [(5th Cir.2007],
See also Local 731 I.B. of T. Excavators and Pavers Pension Trust Fund v. Diodes, Inc.,
Where a plaintiff relies on documentary evidence with company-generated statistics instead of personal sources, the Fifth Circuit followed the Second Circuit’s standard in In re Scholastic Corp. Securities Litigation,
Allegations of a conversation between one party’s unnamed high ranking official/top executive and a named executive of another is sufficient to meet the Novak standard for a source if the unnamed person in such a position would possess the information pleaded and that this executive was the source for the information. Id. at 357.
A “forward-looking statement” is defined in 15 U.S.C. § 77z-2(i)(1) in relevant part as:
(A) a statement containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure or other financial items;
(B) a statement of the plans and objectives of management for future operations, including plans or objectives relating to the products or services of the issuer;
(C) a statement of future economic performance, including any such statement contained in a discussion and analysis of financial condition by the management or in the results of operations included pursuant to the rules and regulations of the Commission....
The PSLRA creates a safe harbor for forward looking statements, whether written or oral, under § 78u-5(e)(l) if “(A) the forward-looking statement is — (i) identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement; or (ii) immaterial; or (B) the plaintiff fails to prove that the forward-looking statement (i) if made by a natural person was made with actual knowledge by that person that the statement was false or misleading; or (ii) if made by a business entity: was — (i) made by or with the approval of an executive officer
Nor do statements of material fact include puffery, i.e., generalized, positive statements about the company’s competitive strengths, experienced management, and future prospects that are too vague, optimistic, and lacking in concrete factual or material misrepresentations to support a securities fraud claim. Southland,
In order to prevent costly discovery until the court can determine whether a filed securities fraud suit has merit, with two rare exceptions the PSLRA instituted an automatic, mandatory stay of discovery in 15 U.S.C. § 78u-4(b)(3)(B), which provides,
In any private action arising under this chapter, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.
See, e.g., Davis v. Duncan Energy Partners, L.P.,
Rule 10b-5’s implied private right of action does not apply to suits against aiders and abettors. Janus Capital Group, Inc. v. First Derivative Traders,
Every person who, directly or indirectly, controls any person liable under any provision of this chapter or any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
For a violation of § 20(a), a plaintiff must show (1) an underlying, primary violation of § 10(b) of the Exchange Act and Rule 10b-5 and (2) direct or indirect control of the violator by the defendant. Southland,
Control person liability is derivative: if a plaintiff fails to state a claim for a primary violation of section 10(b) or Rule 10b-5, any claim for control person liability fails. ABC Arbitrage,
B. FCPA
The FCPA is both a civil and a criminal statute. Penalties for knowingly violating the FCPA can be civil and criminal and include monetary penalties and imprisonment. 15 U.S.C. § 78ff. The U.S. Sentencing Guidelines are used to determine the criminal penalty range.
The FCPA, an amendment to the Exchange Act,
The FCPA controls bribery by (1) prohibiting any U.S. citizen (individual or corporate) from bribing a foreign official, 15 U.S.C. § 78dd-l; and (2) establishing record-keeping rules for issuers of securities of publicly held corporations registered under the Exchange Act, 15 U.S.C. § 78m(b)(2). The latter (2) is composed of two categories: (1) the issuers are required to “make and keep books, records and accounts which, in reasonable detail,
More specifically, the anti-bribery provisions of the FCPA, 15 U.S.C. § 78dd-1(a),
From 1977 to 1979 the SEC mainly focused on anti-bribery provisions of § 78dd-l(a)(l), but subsequently it has focused its enforcement proceedings on the books and records provision, section 13(b)(2)(A), as amended, 15 U.S.C. § 78m(b)(2)(A) violations, and on the internal controls provisions, § 78m(b)(2)(B) that breach the statute’s two requirements: “(1) a company must keep accurate books and records reflecting the transactions and dispositions of the assets of the issuer, and (2) a company must maintain a reliable and adequate system of internal accounting controls.” S.E.C. v. World-Wide Coin Investments, Ltd.,
“(a) Make and keep books, records, and accounts which, in reasonable detail,18 accurately19 and fairly reflect the transactions and dispositions of the assets of the issuer; and
(b) Devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are being executed with management’s general or specific authorization;
(n) transactions are recorded as necessary (l) to permit preparation of financial statements in conformity with generally accepted accounting principles, and (11) to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management’s general or specific authorization; and
(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences....
An “issuer’s” books and records for purposes of accounting control requirements include those of the subsidiaries and affiliates under its controls, including foreign subsidiaries and joint ventures. DOJ/SEC Resource Guide at p. 43.
Section 13(b)(2) of the FCPA and the rules promulgated under it “are rules of general application which were enacted to (1) assure that an issuer’s books and rec
In re Nature’s Sunshine Products Securities Litigation,
Here the FCPA allegations, which cite ever increasing enforcement actions by the SEC and the DOJ in recent years, in Lead Plaintiffs view serve to show the heightened risk of Key’s investment and of doing business in Mexico and Russia, as well as misrepresentations by Defendants, given Key’s repeated statements that Key fully complied with FCPA provisions, yet its internal controls were so inadequate as to “underscore[ ], at minimum, the gross recklessness with which Defendants misled investors.” #37 at ¶¶ 5-6. Lead Plaintiff asserts that ultimately Key revealed that the SEC was investigating Key for potential FCPA violations in its Russian operations, with the result that Key’s share price and the company suffered significant economic loss. Id. at ¶¶ 9-13. The complaint states that because of this SEC’s investigation of its Russian operations, “Key discovered potential FCPA violations in Mexico that required self-disclosure to both the DOJ and SEC, and that Key recorded a massive impairment to goodwill and other assets at its Russia reporting unit.” #37 ¶ 73.
There is no implied private right of action under the FCPA. Lamb v. Phillip Morris, Inc.,
III. Allegations of the Consolidated Amended Complaint (#37)
With the continuing downturn in its domestic oil and gas operations, by 15.4% just in 2013, in 2011 Key had begun a couple of years earlier aggressively expanding its international business and subsequently during the Class Period as part of its business and growth strategies, Defendants urged investors to take advantage of international growth opportunities
In its 2009 Form 10-K, filed with the SEC on February 26, 2010, Key reported that in the United States in 2009, it had “1.8 million rig hours and 1.7 million trucking hours, which was a decrease of 35.2% and 28.2%, respectively, from 2008 activity levels and 28.1% and 24.8%, respectively from 2007 activity levels.” #87, ¶ 14. At the same time, it reported this decline as offset by “our expansion into Mexico and Russia during 2009, and the full year effect of acquisitions completed during 2008.” Id. It further stated that it expected Petróleos Mexicanos (“PEMEX”), Mexico’s state-owned oil company and Key’s biggest international client, “will maintain their level of workover activity and that the rigs we have currently operating in Mexico will be utilized for all of 2010.” Id.
In its 2010 Form 10-K, filed with the SEC on February 28, 2012, Key emphasized the significance of its international expansion, pointing out that the revenues for its Well Servicing segment increased 14% over 2009, attributable to “international expansion, improved pricing and additional revenues from 2010 acquisitions, offset by lower revenues attributable to our operations in Mexico due to a decrease in work for [PEMEX].” #37 at ¶ 36. It also stated that in 2009, while revenues in that same segment fell significantly because of commodity prices and the financial crisis, “the expansion of our operations in Mexico and incremental rig hours from our Russian joint venture in 2009“ partially compensated for this downward trend”. Id.
Although there was a slowdown in its Mexican operations that year, purportedly caused by budget issues at PEMEX, Key still predicted continued growth in Mexico in 2011. #37 at ¶ 37. In its 2010 Form 10-K, Key represented that PEMEX had commenced operations under its 2011 capital budget, and Key’s activity started to increase from its depressed 2010 levels. Key therefore stated that it “anticipate^] strong demand through most of 2011 for our rigs currently deployed in Mexico, primarily in the Chicontepec region.” Id.
At the Pritchard Capital Energize Conference in San Francisco, California on January 4, 2012, Whichard reported, “Internationally our presence continues to grow.... As we exit Q4, we’ll have 24 rigs operating in Mexico with PEMEX demanding more equipment.” #37 at ¶ 38.
In a press release on February 16, 2012, in announcing its financial results for the fourth quarter and full year of 2011 Key represented that “[t]he strong improvement in international results in 2011 was driven by higher rig activity in Mexico ...” #37, ¶ 39. The next day in a conference call for analysts and investors, Alario bragged of Key’s success in Mexico: “When we first entered the Mexico market back in 2007 with three rigs, we believed then that it could become a 40-to 50 rig market for Key. I am pleased to report that our activity in Mexico should more than double in 2012, with at least 40 rigs for the year compared to an average of 18 rigs in 2011.” Id.
In its Form 10-K for the year 2011, filed with the SEC on February 29, 2012, Key indicated, “We generate significant revenue from our contracts with” PEMEX, and “in Mexico we were awarded two $90 million contracts for work in the Aceite Terciario del Golfo (“ATG”) field. The contracts led us to increase our rig count in the country during 2011 with additional rigs planned for the country in 2012, doubling our rig count in the country.” Id. at ¶ 41. In the same document, buttressing its emphasis on the importance of Key’s expan
Whichard again bragged about Key’s Mexican business at the Raymond James Institutional Investors Conference in Orlando, Florida on March 6, 2012, representing that “[o]ur international revenue doubled year-over-year, if you pull Argentina out of the mix. And 80% of our increase came from Mexico and increases in the Middle East as well as Columbia [sic].... PEMEX has a strong demand for additional workovers. They’ve asked us to double our presence there. We did.” #37 at ¶43 (emphasis in the complaint).
Key issued a press release on June 26, 2012 announcing second quarter 2012 financial results: “The revenue and margin improvement was driven primarily by higher activity in Mexico.” #37 at ¶ 44 (emphasis in complaint). Alario stated, “Internationally, our second quarter results improved considerably driven primarily by the full deployment of assets in Mexico where demand for our services continues to grow.” Id.
In sum, Key represented that its growth was largely based on positive trends in its Mexico operations and that Mexico was driving, and was expected to continue driving, its financial successes. Despite these optimistic statements, however, the complaint asserts that Key’s internal controls were not strong, Defendants’ representations were thus not made in good faith, and Defendants were grossly reckless in misleading investors. #37 at ¶ 45. Indeed, “had Key’s compliance machinery been as developed and stringent as Defendants represented, it would have been impossible for Defendants not to know that its success in certain international markets was, at least in part, the result of rampant FCPA violations.” Id.
The substantial increase in recent years in United States’ regulation and enforcement of the FCPA should have given Key ample warning of the need for great vigilance in doing business abroad and for essential internal compliance controls. For instance, on November 16, 2010, Assistant Attorney General Lanny A. Brewer admonished at the 24th National Conference on the FCPA, “FCPA enforcement is stronger than it’s ever been — and getting stronger. We are in an era of FCPA enforcement; and we are here to stay.” #37 at ¶ 57. The severity of penalties for violations also “skyrocketed,” and companies worldwide “are now well aware of the increasingly severe criminal and civil penalties imposed by the DOJ and SEC in FCPA cases.” Id. at ¶ 58. The risks were highly publicized when Key was expanding further into international markets. In 2009 in an article in the International Trade Law
Key’s Board of Directors adopted a Code of Business Conduct (“Code”) with an introductory letter by Alario stating that all Key employees “must commit to always acting lawfully, ethically and with integrity,: and summarizes, “Do the right thing without exception.” #37, ¶¶ 94-95. The Code “applies to the Company and its subsidiaries and affiliates[,] ... including all business units in all of our offices and locations around the world[, but] [a]ll employees and officers in the business units are expected to be familiar with the Code and apply it in the daily performance of their work-related responsibilities.” Id. ¶ 95. An Ethics Committee (composed of representatives from the Company’s Internal Audit, Legal, Human Resources, and Operations departments) and the Board of Directors’ Audit Committee monitor and oversee compliance with “applicable laws and regulations.” Id. ¶ 96. The Code especially highlights the Audit Committee’s oversight role:
The Audit Committee ... shall have oversight of the administration of the Code and responsibility for the Ethics and Compliance program within the Company. Significant or material events related to the Company’s Ethics & Compliance program shall be reported immediately to the chair of the Audit Committee. At least once a year, the Ethics Committee or Director-Internal Audit shall report to the Audit Committee regarding the Company’s Ethics & Compliance program activities, and of the occurrence of all significant events relating to the Code.
Id. The Code instructs Key employees about limitations on gifts given to governmental officials (“In the U.S., an employee may not give gifts of more than nominal value ($100.00) to an actual or prospective customer, supplier, or contractor of the Company, or any governmental official, in an attempt to establish dealings with the Company providing such gifts, without written approval of the employee’s supervisor.”), and admonishes they must “[n]ot offer bribes or accept kickbacks from our suppliers, contractors, or customers for any reason.” #37 ¶ 97. It also informs employees that the FCPA “prohibits .payments to foreign officials for the purpose of obtaining or keeping business” and that under the FCPA “a ‘foreign official’ is any officer or employee of an instrumentality of a foreign government, including state-owned or controlled energy companies, such as Petróleos Mexicanos, SA (‘PE-MEX’), as well as political officers and candidates for political office. Further description and examples, as well as instructions for proper transaction of business inside the U.S. are found on-line in the Company’s FCPA Compliance Manual.” #39 ¶ 98.
Key’s Foreign Corrupt Practices Act Compliance Manual (“FCPA Compliance Manual”), effective June 6, 2008, also contains an introductory letter signed by Alar-io:
It is our policy that the Company, as well as each person or entity acting as a representative or advisor to the Company, shall fully comply with all applicable provisions of the FCPA. Employees, officer, directors, agents, and representative who transact business for the Company internationally are expected to understand and comply with the provisions in this Compliance Manual, to avoid inadvertent violations, and to recognize potential issues in time for them to be appropriately addressed.
#37 ¶ 99. The Manual is divided into two parts: “FCPA Policy” and “FCPA Procedures.” #37 ¶ 100.
The policy of Key and its subsidiaries and affiliates is that “the Company and each person or entity acting as a representative or advisor to the Company shall fully comply with all applicable provisions of the [FCPA]” and prohibits “use of Company funds or assets for any unlawful, improper or unethical purpose,” noting that any “[i]mproper gifts, payments or offerings of anything of value to foreign officials could jeopardize the growth and reputation of the Company, and will not be tolerated.” #37 ¶ 101. The FCPA Compliance Manual governs “all financial record-keeping activities to which Key is subject by virtue of the federal and state securities laws, including the U.S. Securities and [sic] Exchange Act of 1934.” #37 ¶ 102.
The FCPA describes the responsibilities of different parties as follows:
Employees. All Company employees who are involved in any way in transactions in foreign countries, or who work temporarily outside the United States, as well as all employees located in the corporate offices in Midland and Houston, Texas, are required to read and comply with the FCPA Compliance Manual. All international employees who are authorized to expend funds on behalf of the Company (not assigned in field positions) are required to read and comply with the FCPA Compliance Manual.
Third Parties. Agents and representatives of the Company who are involved in any way in transactions in foreign countries, or who work outside the United States are required to read and comply with the FCPA Compliance Manual.
Accounting Department, The Accounting Department shall maintain accounting procedures to ensure that no false or misleading entry is made in the Company’s books and records for any reason. The Accounting Department should also maintain financial reporting and controls to prevent FCPA violations.
Audit Department. The Internal Audit Department, in conjunction with the FCPA Compliance Officer, will develop an annual FCPA plan, as approved by the Audit Committee. Internal Audit will implement the audit plan and also perform other random compliance audits as may be requested from time to time by management, the Audit Committee or the FCPA Compliance Officer.
FCPA Compliance Officer. Appointed by the Company’s General Counsel, the FCPA Compliance Officer will be responsible for the FCPA Compliance Manual, implementing and monitoring the Company’s FCPA compliance program, including compliance certifications, and providing training to employees and third parties concerning the FCPA. The FCPA Compliance officer [sic] shall also investigate and approve the employment of all foreign agents, any gifts or entertainment with foreign officials, and the commencement of significant business operations outside the United States.The FCPA Compliance Officer shall also investigate any allegations of misconduct.
#37 ¶ 103. Key’s FCPA Policy emphasized, “If the situation warrants a token gift of other than nominal value, the employee must consult with the FCPA Compliance Officer prior to offering such a gift. The approval of the FCPA Compliance Officer is required to ensure that the gift is consistent with the FCPA, and that the gift is lawful, customary, and necessary to the conduct of business in the country where it is made.... Employment of a foreign agent, commencement of significant business operations outside the United States, gifts, or entertainment of a foreign official must all be approved in advance by the FCPA Compliance officer.” #37 ¶ 104.
Last of all, the FCPA Policy “recognizes and emphasizes the importance of anti-corruption training as an essential component of an FCPA compliance program. To that end, Key will provide FCPA Anti-corruption training, both in person and through web-based programs, periodically at times to be determined by the Company’s General Counsel.” #37 ¶ 105. Any employee who violates the FCPA or the Company’s FCPA Policy “will be disciplined and may be terminated. Intentional violations of the FCPA will result in termination.” Id.
In the second half of the FCPA Compliance Manual regarding procedures, the broad definitions of “foreign official” and “anything of value,” including with respect to third parties, as well as the need for due diligence and investigation of the “reputation, beneficial ownership, professional capability and experience, financial standing and credibility” and history of compliance of any prospective Representative and any acquisitions and joint ventures, are set out #37 ¶¶ 106-110. The procedures require Key’s Accounting Department to be responsible for maintaining and enforcing Key’s accounting and record keeping policies and Key’s Internal Audit Department with auditing Key’s compliance with policies state in the Compliance Manual and related policies and procedures constituting its internal control system. #37 ¶ 111. The procedures require Key to “maintain a system of internal account controls sufficient to provide reasonable assurances” that
a. transactions are executed in accordance with management’s general or specific authorization; b. transactions are recorded as necessary: (i) to permit preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) or any other criteria applicable to such statements; and (ii) to maintain accountability for assets; c. transactions are recorded in the books in accordance and compliance with GAAP, as well as applicable laws and regulations; d. access to Key assets is permitted only in accordance with management’s general or specific authorization; and e. the recorded accountability for corporate assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
#37 ¶ 112. The procedures require “[m]on-itoring and auditing systems” in place to detect policy violations and review personnel records of those who deal with governmental officials or who submit financial data that affect Key’s financial statements or reports. #37 at ¶ 113. Similarly Key’s Audit Department must conduct FCPA audits based on an annual FCPA audit plant and must “interview persons responsible for administering, implementing and monitoring Key’s compliance program.” Id.
The complaint asserts that given these accounting and controls were supposedly in place at Key through its Code of Business Conduct and its FCPA Compliance manual, any illegal payments made regard
In addition the government has provided companies with clear guidelines on designing and implementing an effective FCPA program, including the DOJ/SEC Resource Guide and the Federal Sentencing Guidelines.
The Consolidated Amended Complaint charges that although Key had compliance programs that looked strong on paper, in actuality Key did not have an effective compliance or training program in effect and therefore “created an atmosphere in which violations of laws and regulations and the Company’s own internal policies were ignored” and there were “rampant FCPA violations.” #37 ¶ 133. Key did not properly staff its compliance department nor establish effective internal controls and internal audit departments. Id. Either Defendants knew or should have known that Key’s internal controls were nonexistent or they recklessly disregarded the controls in place. Id.
The Consolidated Amended Complaint alleges that six, unidentified confidential witnesses (“CWs”) have come forward to testify against Key with regard to its illusory compliance program and its actual FCPA violations. #37 at pp. 1-2. CW2, a Senior Internal Auditor at Key from May 2012 through July 2012, who had worked at several other large public companies and had substantial experience conducting audits both domestically and abroad, even in countries known for having corrupt business cultures,
CW6, a Corporate Auditor at Key from May 2011 through May 2013,
CW6 revealed that internal auditors were sent to Mexico several times in 2012 and 2013 to learn what kinds of control processes needed to be implemented in such local operations as payroll, purchasing, etc., but that the auditors did not perform any audits of potential FCPA violations because they were not asked to do so. #37 ¶ 137. CW6 also complained that “a lack of response” from senior executives in Mexico obstructed the auditing team’s ability to finish its job and compromised the audit’s independence. Id. CW2 thought that if Key had focused its internal audits on such critical financial processes, instead of on safety, it would have uncovered improper activity that was overlooked, such as Key’s Board of Directors’ request in 2012 for an internal audit of the use of company credit cards. Id. An audit conducted in 2012 uncovered widespread misuse of these for personal expenses which CW6 substantiated. Id. The complaint further asserts that the “confidential witnesses substantiated that Key’s operations in Mexico were hampered by accounting irregularities,” but does not identify any particular accounting irregularities. #37 at ¶ 167.
In addition, CW2 informed Plaintiffs that CW3, after observing unusual numbers in the accounting records of Key’s Mexican operations, informed CW2 that millions of dollars of accruals were listed on these accounting records without being cleared for much longer than the 30-day limits, indeed for over 90 or 180 days, when nothing was booked as an actual sale or payment CW3 was told not to speak to Lead Plaintiff through his attorney. #37 at ¶ 138.
CW4
When the SEC began its investigation of Key’s possible FCPA violations in Mexico and Russia, the Board of Directors asked CW5 to speak with the SEC and the law firm that Key hired to conduct an internal investigation. Contrary to Key’s representations that in pursuing a joint venture by acquiring a drilling company named Geos-tream in Russia, Key was moving cautiously and following the FCPA and its own policies and procedures, while aligning them with Geostream’s, Key suddenly purchased an initial 50% interest in Geos-tream in two investments in 2008 and 2009, and then the remaining 50% on April 9, 2013, without performing sufficient due dil-igences to satisfy the SEC. #37 ¶ 141. CW2 commented, “Due diligence was done, but it wasn’t as thorough as it should have been” and did not provide a clear picture of Geostream’s operations. #37 ¶ 143. He further noted that there was concern about liability because before Key purchased the remaining 50%, since Key had almost no access to Geostream’s
CW1,
After the acquisition was completed, Key allegedly learned that Geostream’s structure and finances were far more complicated than Key had expected. Geos-tream held offshore shell companies, among which it made transfers of ownership from one business to the next. #37 ¶ 144. CW2 asserted that Geostream had “16 companies under the Russian umbrella,” and that “[o]bviously the FCPA was really foreign to them.... They have a different kind of mentality there.” Id. Given Russia’s reputation for corruption, the complaint asserts that Key was reckless at best and that the lack of oversight obscured whether Geostream’s employees were violating the FCPA. Id.
Key had already acquired 100% of Geostream, which it characterized as its primary growth strategy in Russia. On February 15, 2013, Alario stated in a conference call with investors and analysts, “Russia is the second-largest oil well inventory market in the world. So there’s great reason for Key to be in that market. And we’re being very, very patient, as we learn about it and as we get better at convincing a small, select group of customers that this highly reliable equipment that we have over there is a better way to go.” #37 ¶ 146. In an October 31, 2013 conference call, Alario stated, “We believe that we can more effectively grow in ... Russia operating the business [ ] ourselves.” #37 ¶ 145.
On May 16, 2014, when Key filed its Form 10-Q for the quarterly period ending March 31, 2014, revealing that the SEC was investigating Key’s operations in Russia, the market first learned of possible FCPA violations by Key. #37 ¶ 145-46. Nor was the Russian revelation of Key’s corrupt culture unique according to the complaint. Key gradually began to reveal problems in its Mexican operations when on January 6, 2014 it disclosed in a press release that PEMEX was auditing $372 million worth of Key’s billings, resulting in Key’s having to take a charge of $2-3 million in 4Q 2013. #137 ¶ 147.
On June 4, 2014, Key filed another 8-K, which disclosed, “In April 2014, the Company became aware of an allegation involving Key’s Mexico operations that, if true, could potentially constitute a violation of certain Company policies, including our Code of Business Conduct, the U.S. Foreign Corrupt Practices Act (FCPA) and other applicable laws.” #37 at ¶ 149. It further stated that it had “conducted an initial investigation of this matter and the Board of Directors of the Company has formed a special committee of independent directors to oversee the investigation” of these and “any other resulting matters.” Id. It also indicated that on May 30, 2013 Key had voluntarily made known the allegation and information from its initial investigation to the SEC and the DOJ and that fines, criminal penalties and/or sanctions relating to the alleged FCPA violations could be imposed on Key. Id.
Even though Key had not disclosed to the public any of the reports on the FCPA investigation, the news of possible violations impacted its financial status. #37 ¶ 150. On July -17, 2014 in a press release, Key divulged that (1) it expected “to record a $30-35 million pre-tax charge for goodwill
In sum, Defendants’ representations throughout the Class Period that Key strictly complied with the highest ethical standards and complied with all applicable laws and regulations, including the FCPA, were materially incomplete and/or false in light of their failure to disclose inter alia “(a) the full magnitude and consequences of the Company’s FCPA violations; (b) that the Company’s compliance function and internal controls were woefully inadequate or not strictly adhered to; and (c) that violations of Key’s internal controls and corporate policy were ignored.” #37 at ¶ 154. Key’s Compliance Manual and its Code of Business Conduct contained false and misleading statements from the beginning of the class period.
The Consolidated Amended Complaint then details a number of other material and purportedly misleading disclosures made during the Class Period. For example, on September 4, 2012 at the Barclays Capital CEO Power Energy Conference in New York, Alario represented that “the core of our story is our business with PEMEX.... I don’t think there’s a better example of value delivered by a service company to a customer than Key’s value to PEMEX.” #37 ¶ 160. He also emphasized that PEMEX entrusted Key to perform some of PEMEX’s riskiest work and “I think [that] proves that PEMEX has got confidence in Key,” while he was leading investors to believe that this confidence would provide future opportunities to do business with PEMEX. Id. The complaint asserts that the statements in ¶¶ 159-161 were materially false and misleading because “Defendants failed to disclose that revenues from PEMEX were overstated due to overbilling and that the Company’s production was in decline.” #37 at ¶ 162.
Regarding Key’s operations in Russia and its at-that-time 50% interest in Geos-tream, Alario represented that its investment in Russia was small but “potentially a good solid market,” explaining,
We’re trying to prove a new business plan there on the back of the idea that reliable equipment, is more valuable to our customers than some of the equipment that they have over there in country [sic]. It’s taking longer than we hoped. But I can tell you that over the course of the last couple of quarters, we’ve convinced more customers than we had in the past that’s the right business model and, as a result, our fortunes in Russia have improved.
#37 at ¶ 161. The complaint asserts that these statements about Russia and Mexico are materially false and misleading because Alario did not disclose that Key’s growth strategy in both countries was substantially due to or directly attributable to conduct that violated the FCPA. See also
On October 2, 2012 at the Johnson Rice Energy Conference in New Orleans, Louisiana, Whichard bragged that Key’s “business has doubled in Mexico year-over-year,” “we’re adding other assets into that market, such as coil, wireline, premium rental equipment, and PEMEX is calling on us to add more and more equipment to their market.” He claimed that he expected Key’s success to continue, that Key was seeking business opportunities not only with PEMEX but with other multinational companies, “so we’re broadening our customer base” in Mexico and looking at opportunities in regions in Mexico beyond Chicontepec area, known as the ATG field. The complaint maintains that Whichard’s statements were materially false and misleading because he did not disclose that Key’s rapid growth and future prospects in Mexico were largely due or directly related to its violations of the FCPA, that Key’s internal controls were knowingly or recklessly inadequate, as discussed previously.
Alario and Whichard allegedly filed a 3Q 2012 Form with certifications that were false and misleading under the Sarbanes-Oxley Act of 2002 (“SOX Certifications,” which the complaint quotes in full without specifying which statements Lead Plaintiff considers false or misleading and why)
In the Form 10K report filed on February 25, 2012, #37 ¶¶ 177-181, Key purportedly made numerous false and misleading statements. Key reported, “Revenues for our international segment increase $134.2 million, or 67.4%, to $333.3 million in the year ended December 31, 2012,” an increase “primarily attributable to increased activity in Mexico.” #37 ¶ 178. In its yearly goodwill impairment analysis in the 10-K, Key reported that the goodwill for its Russian unit at the end of 2012 was approximately $24.6 million and the fair value of these assets exceeded the carrying value by 17.8%, while Key did not record any asset impairments in that year. Id. ¶ 179. These statements were false, according to the complaint, because Key’s violations of the FCPA significantly impacted its revenue growth in these markets, while the statements falsely implied that Key’s success was based on legitimate business activities. These statements also falsely implied that Key had adequate internal controls, compliance policies and procedures, in place. Id. ¶ 180-181. The Form 10-K had Sarbanes-Oxley certifications signed by Alario and Whichard stating that the information was accurate and all material changes to Key’s internal controls over financial reporting were disclosed. Id. ¶ 181.
In a press release on April 25, 2013, filed the next day with the SEC on Form 8-K, Key announced its financial results for IQ 2013 and revealed that PEMEX had significantly reduced activities in Mexico, resulting in an adverse impact on Key’s share price, which dropped nearly 17% from a closing price of $7.09 on April 25, 2013 to a closing price of $5.90 on April 26, 2013. #37 ¶¶ 184-186. In the same release Key stated that it intended to expand operations in Russia, again not revealing that its growth strategy was largely based on conduct that violated the FCPA and the erroneous impression it had created that it had adequate internal controls in place. Id. ¶ 187.
Also, on May 3, 2013 Key filed its IQ 2013 on Form 10-Q, stating that its revenue from its international business had declined because of PEMEX’s slowdown, but that its overall revenue for that period increased by $20.6 million, or 33.3%, compared to $82.4 million in IQ 2012, “primari
In 2014 there were growing losses in the price of Key’s common stock as negative news about Key’s international business operations 'gradually overwhelmed the positive. In a January 6, 2014 press release, filed the next day on Form 8-K, Key disclosed that PEMEX was auditing $372 million of Key’s billings under its contracts with PEMEX and that Key would take a charge of between $2-3 million in 4Q 2013. #37 ¶¶ 204, 206. Even though Defendants did not disclose its violations of the FCPA or its lack of effective internal controls, Key’s share price dropped over 3% from its closing price of $7.83 on January 6, 014 to $7.55 the next day.
On February 13, 2014 Key issued a press release announcing its 4Q and full year 2013 financial results, which included quarterly International segment revenues of $38.1 million, down 14.5% sequentially. #37 at ¶ 207. Despite the loss, in a conference call the next day Alario remained upbeat about Key’s future success in Mexico and Russia. #37 ¶¶208, 210. Key’s share price increased more than 2%, rising from a closing price of $7.81 on February 13, 2014 to $8.00 on February 14, 2014. Id. ¶ 209.
Key’s 2013 Form 10-K, filed on February 25, 2014, warned that Key’s “failure to comply with the [FCPA] and similar laws may have a negative impact on our ongoing operations,” and “We could be subject to sanctions and civil and criminal prosecution as well as fines and penalties in the event of a find of violation of the FCPA or similar laws by us or any of our employees,” but also reported the value of its goodwill in its Russian reporting unit was around $23 million, with the fair value of these assets exceeding the carrying value by 86%, statements that the complaint asserts were false and misleading for the reasons discussed previously. #37 ¶¶ 212-213. The document included Sarbanes-Ox-ley certifications signed by Alario and Dodson. Id. ¶ 214.
On April 30, 2014 Key issued a press release, filed with the SEC the next day on Form 8-K, announcing that in the first quarter of year 2014 its International revenues were down 15.7% sequentially, to $82.1 million. #37 ¶ 215. In a conference call on May 1, 2014, Alario stated about Key’s business in Mexico, “We’ve reached the point where we’re willing to say that our International business has essentially reached bottom. Mexico has clearly been a drag on this segment.” #37 ¶ 216. Yet he also expressed confidence that Key would turn the situation around: “In Mexico we’ve also recently seen a number of opportunities from integrated service companies under these incentive contracts, and some of those are under negotiation now. And hopefully, those will, as you indicate, will [sic] get started sooner rather than later.” Id. Alario did not discuss the violations of the FCPA nor Key’s lack of adequate internal controls, but nevertheless, the share price of Key’s common stock dropped from a closing price of $10.04 on April 30, 2014 to a closing price of $9.14 on May 1, 2014. Id. ¶¶ 217-218.
Finally on May 6, 2014 in its Quarterly Report of IQ 2014 on Form 10-Q, with certifications signed by Alario and Dodson stating that the information was accurate, Key disclosed for the first time that it was being investigated by the SEC for possible FCPA violations in its Russian operations.
On July 21, 2014, investment bank Imperial Capital downgraded Key to In-Line from Outperform and lowered its price target for shares to $7.50 from $10.50. Two days later brokerage firm Wunderlich Securities repeated a “Hold” rating on Key and stated, “Overall it’s clear that Key is struggling even as the domestic services market is showing overall improvement and while it has been able to reduce debt nicely, we remain Hold rated given the company-specific headwinds facing KEG.” #37 ¶ 225.
To demonstrate scienter, the complaint, asserting that at the end of the Class Period Key’s revelations first of FCPA violations in its Mexican operations, then less than a month later of possible violations involving its . Russian operations, and on November 3, 2014 of investigations of its Colombia operations,
The complaint asserts that by virtue of their positions at Key, Individual Defendant had access to undisclosed adverse information about Key, its business, operations, finances, and present and future business prospects. They had access to such information through internal corporate documents, conversations, connections with other corporate officers, traders, marketing experts, attendance' at management and Board of Directors’ meetings, etc. Thus, the complaint claims, “it is appropriate to treat Individual Defendants as a group for pleading purposes and to presume that the materially false, misleading and incomplete information conveyed in the Company’s public filings, press releases, and public statements ... was the result of the collective actions of the Individ- ' ual Officers identified above.” #37 ¶ 252.
Moreover, “[a]s officers and controlling persons of a publicly held company whose common stock was, and is, registered with the SEC pursuant to the Exchange Act, traded on the NYSE, and governed by the
Lead Plaintiff alleges that plaintiffs are entitled to a presumption of reliance based on the fraud on the market doctrine.
Because the Court does not yet address the issue of class certification, it does not otherwise summarize allegations relating to it.
IV. Motions to Dismiss (#37 and 50)
The Court will address the arguments in the two motions together, noting that Whichard has joined in that of the other Defendants.
Defendants observe that Plaintiffs have identified four broad categories of allegedly false and misleading statements during the Class Period that it claims violated Section 10(b) and Rule 10b-5: (1) statements in the Company’s Code of Business Conduct and FCPA Compliance Manual; (2) statements about Key’s business in Mexico and Russia that purportedly omitted disclosing that Key’s growth and growth strategy largely resulted because of FCPA violations; (3) statements allegedly falsely portraying Key’s business in Mexico; and (4) statements in certifications accompanying Key’s SEC filings that purportedly omitted internal control deficiencies and FCPA violations at Key. #49 at p. 10. Furthermore Defendants assert that because the allegations in the controlling complaint were not made based on Plaintiffs personal knowledge, they are based on information and belief, triggering the PSLRA requirements that Plaintiff must plead sufficient facts with particularity to support its claims that the statements were false when made. ABC Arbitrage,
Defendants first contend that Plaintiffs’ Amended Complaint fails to allege falsity with the requisite particularity under the PSLRA. Defendants never represented that there would never be an FCPA problem, but instead warned investors of the risks of a FCPA violation and that the Company’s statutory FCPA compliance depended on its compliance program and the efforts of its employees, agents, affiliates and business partners to follow it.
While Plaintiffs claim that statements in Key’s Code of Business Conduct and FCPA Compliance Manual
The complaint contains allegations from six purported “confidential witnesses” (“CWs”), but the sum of their allegations is that Key’s FCPA controls were adequate, not even close to constituting particularized allegations showing that the Code or Manual or something Individual Defendants said was false at the time. See, e.g., In re Intelligroup Sec. Litig.,
Furthermore, Defendants insist that Plaintiffs failed to raise a strong inference of scienter. There are no allegations suggesting that Defendants had any motive to commit securities fraud or that Defendants sold stock during the Class Period or at unusual times and at unusual prices, or that Key used its stock to purchase other companies. Nor do Plaintiffs provide particularized allegations that anything said by any Individual Defendant was known to be false by the Individual speaking at the time he spoke. Finally Plaintiffs assert that because Key and the SEC were investigating possible FCPA violations, such FCPA violations must have occurred and Individual Defendants must have known about them at the time statements issued. Here, too, such scienter-by-inference arguments have been standardly rejected by the courts. Defendants further note that the complaint’s allegations contradict each other: it alleges that Key falsely represented that its internal FCPA controls were strong when the opposite was true, but contemporaneously alleges that Individual Defendants must have known of the FCPA violations because a functional FCPA compliance system would have alerted those up the corporate ladder of such FCPA violations. Instead, argue Defendants, the complaint gives rise to a much stronger inference that to the extent Key had FCPA problems, Individual Defendants were not aware of them.
Last, the complaint fails to allege loss causation, i.e., that the alleged misrepresentations caused inflation of the price of Key’s common stock. Defendants insist that the two stock price drops that
Backing up the complaint’s allegations with documentary evidence, Defendants maintain that Key was open and transparent about its business operations in Mexico, including about the significance of its relationship with PEMEX. Among its reports to the SEC Key identified its reliance on PEMEX as a “Risk Factor” in its Form 10-K in 2009.
The alleged misrepresentations are generic, forward-looking statements concerning Key’s overall business in Russia and Mexico or mere puffery about Key’s internal controls. None of the statements is a guarantee that the FCPA investigations or violations would never occur in relation to Key’s operations in these area, nor that Key’s internal controls were foolproof. Furthermore statements about the materialization of risks that the Company has previously disclosed and warned against are not corrective disclosures.
Key contends that Russia was never a central focus of its international growth strategy, but “a small market for Key” according to Alario. Ex. 7, Feb. 15, 2013 Earnings Call Tr. at 9. Basically Key’s operations were comprised of an ownership in Geostream, in which it gradually obtained first a 26% interest, then 50% in March 2009, and finally 100% on May 3, 2013. Key reported satisfactory progress in the region until political instability began threatening its operations in 2014. In July of that year Key revealed that it expected “to record a $30 million to $35 million pre-tax charge for goodwill and other asset impairments related to its operations in Russia.” Ex. 18, July 17, 2014 Press Release at 1. Key notes that it tested its Russian reporting annually from 2010 to 2013 and found that the fair value of the unit exceeded its carrying value until June 2014, when Key found that an impairment had occurred and calculated the relevant charge. Ex. 3, Feb. 25, 2011 Form 10-K at 45, 80; Ex. 4, Feb. 29, 2012 Form 10-K at 46; Ex. 5, Feb. 25, 2013 Form 10-K at 41; Ex. 1, Feb. 25, 2014 Form 10-K at 41; #49 at 8 n. 2. Key emphasizes that Plaintiff does not allege that Key was required to take an impairment charge earlier than it did.
Key argues that throughout the Class Period it repeatedly disclosed FCPA compliance problems as a primary risk factor in conducting international operations that could negatively impact its business. See, e.g., Ex. 5, Feb. 25, 2013 Form 10-K at 16; Ex. 1, Feb. 25, 2014 Form 10-K at 17. It adopted its Code of Business Conduct and its FCPA Compliance Manual to instruct employees about their obligations under the FCPA and established procedures to be followed, but it never guaranteed that
As for the Sarbanes-Oxley Act certifications signed by Alario and Whichard, attached to Key’s SEC filings during the. Class Period, which the complaint at ¶¶ 166-167 asserts were materially false and misleading because Alario and Which-ard “were at the time aware of and/or recklessly disregarded material weaknesses in Key’s internal controls that were not disclosed to the investment public,” Defendants maintain that the allegation confuses financial reporting controls in the Sar-banes-Oxley certifications with the anti-corruption policies or controls designed to ensure FCPA compliance. See In re Invision Techs. Inc. Sec. Litig., No. C-04-3181 MJJ,
Indeed, Defendants highlight the fact that Plaintiffs fail tp allege any motive
Finally, contend Defendants, because Plaintiffs have failed to state a primary violation of § 10(b) and Rule 10b-5, their derivative control person claims under section 20(a) must also be dismissed. Shaw,
Whiehard’s separate motion to dismiss (#50) alleges additional grounds for dismissal of claims solely against him. The only allegations about him are the following: (1) Whichard served as Key’s CFO from March 2009 until he retired in March 2013; (2) Whichard allegedly made false statements when he discussed Key’s international growth at the Johnson Rice energy Conference in Orlando Florida on October 2, 2012, full transcript attached as Ex. A
The complaint alleges that at the Johnson Rice Energy Conference he made two false or misleading statements relating to Mexico, but it misquotes them (#37 ¶ 163). Whichard states them in full, as evidenced by th transcript, Ex. A:
Our business has doubled in Mexico year-over-year. And in addition to doubling of our service rig business, we’re adding other assets into that market, such as coil, wireline, premium rental equipments, and PEMEX is calling on us to add more and more equipment into their market. (Ex. A at 3)
**********
And just focusing on international briefly, I mentioned the growth that we’re seeing in Mexico. We expect it to continue. Our business opportunities are with PEMEX obviously, but also with other large multinational companies, so we’re building our customer base, as it were, in Mexico. We’re looking at opportunities in other regions of Mexico outside of the Chicontepec areas, referred by them as the ATG field. (Ex. A at 4)
Whichard points out that the complaint does not claim that any of these statements is false, but only that Whichard failed to reveal that “Key’s ‘rapid growth’ and ‘future prospects’ in Mexico were largely attributable to or directly related to conduct that violated the FCPA.” #37 ¶ 164. Whichard emphasizes that the complaint does not provide any particularized facts showing that (1) there was any conduct in Mexico that violated the FCPA; (2) if there were, that Whichard was aware of it at the time he made these statements; and (3) that the purported FCPA violation would have rendered any of these statements misleading.
As for the certifications, which are identical in all material respects, the complaint asserts that “Alario and Whichard were at the time aware of and/or recklessly disregarded material weaknesses in Key’s internal controls that were not disclosed to the investing public.” #37 ¶ 167. The complaint does not identify which of the provisions in those certifications were allegedly false or misleading nor provide particularized facts to support the claim. Nor does it provide particularized facts to show that when he signed the certifications, Whichard was aware of any “material weaknesses” in Key’s internal controls. “Material weakness” in a company’s internal controls is a term of art in accounting that means “a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.” 17 C.F.R. § 240.12b-2. There are no facts alleged showing that Whichard had actual knowledge of any material weakness in Key’s internal controls over financial reporting, nor allegations that any CW told him of any material weaknesses in internal controls. The Sar-banes-Oxley certifications refer to “internal control over financial reporting”; they do not relate to FCPA compliance policies and procedure and do not make any statements about the adequacy of systems designed to insure compliance with the FCPA. Even if they did, the complaint states that Key had policies, procedures, and training (including the Code, the Manual, and anti-corruption training) to address FCPA issues and that when Key became aware of a potential problem in Mexico, it launched an investigation and informed the SEC and DOJ. #37 at ¶¶ 94, 99, 105, 149. While Plaintiffs allege that
The complaint also alleges that “Key’s operations in Mexico were hampered by accounting irregularities” (#37 ¶ 167). While the complaint alleges, “CW2 was contacted by CW3 to discuss unusual numbers that CW3 observed in the accounting records of Key’s Mexican operations” related to accruals on Mexican books (id. ¶ 138), it fails to identify when these alleged observations occurred or to what they related within the Mexican operations or that the accruals resulted in any misstatement in Key’s financial reporting. Moreover the complaint itself reflects that the CW2 did not use the words “accounting irregularities,” but instead “was contacted by CW3 to discuss ‘unusual numbers,”’ and does not define “unusual numbers.” #37 ¶ 138. The complaint does not allege that the accruals were the result of a lack of internal control over financial reporting nor does it assert that Whichard had any knowledge about the accruals.
The complaint alleges that Key’s acquisition of the last half of Geostream was done without due diligence, a claim unsupported by particularized facts, but is Plaintiffs’ basis for claiming that Whichard’s certification was false and misleading about internal controls over financial reporting. The complaint, however states that the acquisition took place on April 9, 2013 (¶ 55), not only after Whichard had left Key the previous month, but months after the only two certifications the complaint asserts that he signed. Thus as a claim against him, it fails.
On February 25, 2013 Key filed its Annual Report on Form 10-K with the SEC, which included the following in the “Risk Factors” section, ¶ 177:
Our ability to comply with the FCPA and similar laws is dependent on the success of our ongoing compliance program, including our ability to continue to manage our agents, affiliates and business partners, and supervise, train and retain competent employees. Our compliance program is also dependent on the efforts of our employees to comply with applicable law and our Business Code of Conduct. We could be subject to sanctions and civil and criminal prosecution as well as fines and penalties in the event of a finding of violation of the FCPA or similar laws by us or any of our employees.
See City of Brockton,
The complaint also charges that the 2012 Form 10-K, certified by Whichard, was false or misleading regarding statements (1) that Key’s revenue growth in its international segments as “primarily due to increased activity in Mexico” because,
Whichard insists that the complaint fails to state a claim under § 10(b) and Rule 10b-5 for securities fraud or for control person liability under § 20(a) against him.
Regarding the former, Whichard contends that Plaintiffs fail to meet pleading requirements for scienter. Lead Plaintiff asserts that its allegations are “grounded in eyewitness accounts of misconduct,” but fails to specify that alleged misconduct (who did what, where, when or why) and fails to allege that any eyewitness witnessed any misconduct by, or discussed suspected violations with, Whichard. Nor have Plaintiffs identified any specific communications with or reports to Whichard that directly contradict his statements. Abrams,
Moreover the complaint asserts that “Individual Defendants,” “personnel at the highest level,” and unnamed “senior management” must have known of the alleged violations based on their positions. #37 ¶¶ 227, 238, 242. Not only may Plaintiffs not use group pleading allegations to create an inference of scienter as to individual defendants, but conclusory allegations that they must have known of the alleged fraud due to their positions and/or ability to access information are insufficient to state a claim. Southland,
Nor does the fact that an SEC investigation is ongoing establish scienter without facts showing that a specific person knew of any purported wrongdoing. Plaintiff does not explain how the ongoing investigation of Key shows that Whiehard made a false statement, no less that he had the scienter required by the PSLRA.
Nor does Plaintiffs vague assertion that Defendants’ Sarbanes-Oxley certifications reveal scienter. Even though the certifications relate to internal controls over financial reportings and disclosures, not FCPA compliance, Lead Plaintiff fails to identify anything in the certifications that is false, and it does not claim that Key misstated any financial information. In re Invision,
The complaint does not allege any motive of any ■ defendant, in making false or misleading statements, showing he benefit-ted from any alleged FCPA violation, such as by selling stock at inflated prices. Nor do Plaintiffs raise an inference of fraudulent intent on Whichard’s part that is as cogent and compelling as the opposing inference that he did not have fraudulent intent. Tellabs,
Last of all, because Plaintiffs have failed to state a claim for a primary violation of § 10(b) and Rule 10b-5 by any defendant, any derivative control person claim also fails.
Lead Plaintiffs Opposition (#51)
The Court largely agrees with Defendants’ analysis of the substantial pleading deficiencies of the complaint and finds Lead Plaintiffs opposition to be filled with the same problems as the complaint. It is comprised of generalized, indefinite, unsupported assertions and arguments, like the allegations in the complaint, which it simply repeats and which fail to meet the pleading requirements which the Court has set forth in detail.
As a threshold matter the Court notes the total inadequacy of Lead Plaintiffs one-paragraph, four-sentence summary of the standard of review (#51 at p. 10), which, given the securities fraud context of the PSLRA and Rule 9(b) (which Lead Plaintiff seemingly ignores), incorrectly asserts, “A plaintiff may survive a 12(b)(6) motion even if ‘recovery is very remote and untimely.’ Twombly,
Furthermore, for purposes of the pending motions to dismiss, the Court’s review is limited to allegations in the First Consolidated Amended Complaint and the documents referenced in or attached to it and the motions to dismiss and relevant materials subject to judicial notice; it may not look to matters outside these parameters, for example to Plaintiffs new comments about post-Class Period events, including that Key has spent more than $59 million on its ongoing investigation, a fact irrelevant to state a claim of securities fraud anyway, or the generalization that Key “in the wake of this expansive investigation, transitioned completely away from its international business, citing the ‘secular trend of aging horizontal wellbores’ and ‘options for the allocation of the Company’s capital.’ ” Plaintiffs’ Opposition, #51 at p. 9. The Court focuses on the specificity of material factual allegations in the complaint, required by Rule 9(b) and the PSLRA, but clearly lacking here, and the case law interpreting the pleading requirements, which Defendants and the Court have shown undermines many of the Consolidated Complaint’s conclusory claims.
The complaint repeatedly claims that numerous statements were false or misleading mainly because Key concealed that its growth and growth strategy were large due to conduct that violated the FCPA and because Key created the erroneous impression that it had internal controls in place to prevent such violations. Lead Plaintiff cannot rely on vague assertions that the SEC and DOJ have increased their vigilance over FCPA violations generally or that Mexico and Russian are rife with corruption to establish that there were violations of the FCPA in Mexico and Russia by Key during the Class Period or vaguely to assert that during the Class Period, Key somehow violated the statute in its operations in these countries. Indeed not a single specific violation of the FCPA (identifying the nature of the violation, when, where, and who was involved) is alleged.
Moreover, the complaint contends that Key’s Code of Business Conduct and FCPA Compliance Manual, on which Key’s all-too-vaguely described internal controls were based, were filled with false representations and omissions for purposes of § 10(b) and Rule 10b-5. Not only have the Court and Defendants shown that courts has found such sources to be aspirational and immaterial puffery, but Lead Plaintiff has failed to allege particular facts demonstrating any breach by any particular Defendant, with scienter, of any employee responsibility in any particular statement set forth in those documents. In re Franklin Bank Corp. SEC. Litig.,
With regard to the Sarbanes-Oxley certifications, Defendants have repeatedly pointed out that they do not relate to FCPA issues, but to the accuracy of financial reports. The complaint does not give a single example of a glaringly erroneous accounting irregularity which was knowingly certified by a Defendant here. Defendants and the Court have pointed out that Lead Plaintiff has failed to plead requisite facts showing that each individual who signed a certification knew how, why, and when an (identified) statement in the certification was false because of identified ‘red flags’ or glaring accounting irregularities.
Nor has Lead Plaintiff adequately alleged loss causation with regard to any disclosure statement targeted in the complaint, but merely alleges statements and subsequent drops or rises in the price of . Key’s common stock.
As pointed out, Lead Plaintiff imper-missibly indulges in group pleading, in inferring knowledge of falsity based on indi
Furthermore, to satisfy the reliance element in a fraud-on-the-market securities fraud action, Lead Plaintiff must allege facts showing not only that each alleged misrepresentation was publicly known and was material, but that Key’s stock traded in an efficient market, and plaintiff traded the stock between the time when the misrepresentation was made and when the truth was revealed. Erica P. John Fund,
Lead Plaintiff has also erroneously relied too heavily on short, generalized statements of unnamed CWs without “discounting” them and providing corroborating “documentary evidence and/or a sufficient general description of the personal sources of the plaintiffs’ beliefs,” as the Fifth Circuit recommends (Shaw Group,
Accordingly, the Court
ORDERS that Defendants’ two motions to dismiss (#49 and 50) are GRANTED. Fui’thermore, the Court
GRANTS LEAVE to Lead Plaintiff to file within 20 days a Second Consolidated Amended Complaint that satisfies the heightened pleading requirements of Rule 9(b) and the PSLRA or to inform the Court that it no longer wishes to proceed with this suit.
Notes
. Key, based in Houston, Texas, is an onshore, rig-based, well-servicing contractor which provides the full range of well intervention services (including the completion of newly drilled wells, workover of existing oil and natural gas wells, well maintenance, and specialty 'drilling services) in all major onshore oil-and gas-producing regions of the United States, as well as in Mexico, Colombia, Ecuador, the Middle East, and Russia.
. Alario at all relevant times was Key’s Chairman, President, and Chief Executive Officer.
. Dodson served as Vice President and Treasurer of Key from 2009 until March 25, 2013, when he succeeded as Key’s Senior Vice President and Chief Financial Officer.
. Wilson at all relevant times served as Key’s Executive Vice President and Chief Operating Officer. As of May 20, 2014 Wilson served as Key’s Executive Vice President responsible for international operations, technology development, and corporate strategy.
. Whichard was Key’s Senior Vice President and Chief Financial Officer.
. The group pleading or group publishing doctrine permits plaintiffs to presume that statements in prospectuses, registration statement, annual reports, press releases, etc. are collectively attributable to persons with direct involvement in the regular business of the company. Southland,
. In Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, — U.S. —,
. Rule 10b-5, adopted by the SEC pursuant to its authority under section 10(b) of the Exchange Act, 15 U.S.C. 10(b)-5.§ 78j(b), states,
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(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 as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
It forbids three kinds of fraud when they are "material” (when there is “a substantial likelihood that the [statement or omission] ... would have been viewed by the reasonable investor has having significantly altered the 'total mix’ of information available”, Basic,
. At times courts consider the reliance element of a Rule 10b-5 action to be part of the causation element. In this contest, "transaction causation” refers to the requirement that the defendant's fraud must precipitate the investment decision.... On the other hand, 'loss causation' refers to a direct causal link between the misstatement and the client's economic loss.” Huddleston v. Herman and MacLean,
. The Supreme Court explained,
[I]f ... the purchaser sells the shares quickly before the relevant truth begins to leak out, the misrepresentation will not have led to any loss. If the purchaser sells later after the truth makes its way into the marketplace, an initially inflated purchase price might mean a later loss. But that is far from inevitably so. When the purchaser subsequently resells such shares, even at a lower price, that lower price may reflect, not the earlier misrepresentation, but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events, which taken separately or together account for some or all of that lower price. (The same is true in respect to a claim that a share’s higher price is lower than it would otherwise have been....) Other things being equal, the longer the time between purchase and sale, the more likely that this is so, i.e., the more likely that other factors caused the loss.... [T]he most logic permits us to say is that the higher purchase prices will sometimes play a role in bringing about a future loss.
. In Higginbotham, a skeptical Chief Judge Easterbrook opined for the unanimous Seventh Circuit panel, concealing names in the complaint "does nothing but obstruct the judiciary’s ability to implement the PSLRA.
. In Central Laborers’ the Fifth Circuit concluded that where a confidential source’s statements lack sufficient detail "such as particular job descriptions, individual responsibilities, and specific employment dates,” there is an insufficient basis to evaluate the information and will not support a strong inference of fraud.
. For purposes of the Exchange Act and the rules promulgated under it, "[t]he term 'officer' means a president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, and any person routinely performing corresponding functions with respect to any organization whether incorporated or unincorporated.” 17 C.F.R. 240.3b-2.
. See David E. Dworsky, Foreign Corrupt Practices Act, 40 Am Crim. L. Rev. 671, 688 (Spring 2009)(footnotes omitted) describes the punishment for individuals violating the FCPA:
Sentencing for individual who violate the FCPA's accounting provisions are determined under section 2B1.1 of the Guidelines, which includes fraud sentencing provisions. Factors that may increase the offense level include committing a substantial part of a scheme from outside the United States or substantially jeopardizing the safety and soundness of a financial institution. The FCPA statutory provisions state that individuals who willfully violate the FCPA accounting provisions may be fined up to $5,000,000 and imprisoned for up to twenty years.
Bribery sentences for individuals are determined under section 2B4.1 of the Guidelines. Individuals who willfully violate the bribery provisions may receive no more than a $100,Q00 fine and five years in prison under the FCPA, although application of the alternative fines provisions of the Sentencing Reform Act has resulted in higher penalties.
For corporations he explains, id. at 688-89,
Sentencing of corporations that have violated the FCPA is determined under Chapter Eight of the Guidelines. Under Chapter Eight, an effective compliance program will reduce the culpability score, while the participation of high-level officials in the illegal action will raise the culpability score.
Under the Act, the maximum penalty for corporations for willful violations of the FCPA accounting provisions is $25,000,000. The maximum corporate liability for breach of the anti-bribery provisions is $2,000,000.
. Pub. L. No. 95-231, 91 Stat. 1495 (1977)(codified as amended at 15 U.S.C. §§ 78m, 78dd-l to -3 (2012)).
. "Reasonable detail is “such level of detail ... as would satisfy prudent officials in the conduct of their own affairs.” § 78m(b)(7).
. In whole, § 78dd-l(a)(Prohibition) states,
It shall be unlawful for any issuer which has a class of securities registered pursuant to section 781 of this title or which is required to file reports under section 78o(d) of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof action on behalf of such issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to—
(1) any foreign official for purposes of—
(A)(i) influencing any act or decision of such foreign official in his official capacity (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or
(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person.
. "Reasonable detail” is defined as "such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.” 15 U.S.C. § 78m(b)(7).
. "Accurately” does not mean with exact precision; the records should "reflect transactions in conformity with generally accepted accounting principles or other applicable criteria.” S. Rep. No. 95-114, S. Rep. No. 114, 95th Cong., 1st Sess. 1977, 1977 U.S.C.A.A.N. 4098,
. The rules promulgated under section 13(b)(2) are the following: Rule 13b2-l provides "No person shall, directly or indirectly, falsify or cause to be falsified, any book, record or account subject to Section 13(b)(2)(A) of the Securities Exchange Act; and Rule 13b2-2 states, "No director or officer of an issuer shall, directly or indirectly, (a) make or cause to be made a materially false or misleading statement or (b) omit to state, or cause another person to omit to state any material fact necessary to make statements made, in light of the circumstance under which such statements were made, not misleading to an accountant in connection with (1) any audit or examination of the financial statements of the issuer required to be made pursuant to this subpart or (2) the preparation or filing of any document or report required to be filed with the Commission pursuant to this subpart or otherwise.” World-Wide Coin,
. The FCPA and Its Impacts in Latin America, Int’l Trade L.J. 27, 27 (Summer 2009).
. #37 at pp. 1-2 states that CW2 "has specific experience with Sarbanes-Oxley and FCPA compliance reviews,” and he "reported to William Tobey, Director of Internal Audit, who also reported to defendant Whichard, Key's CFO, and then defendant Dodson, who replaced defendant Whichard as CFO.”
. The complaint states that CW6 in his position as Corporate Auditor headed operation and business process audits, and “was also responsible for conducting control tests to confirm that the Company complied with internal controls over financial reporting.” #37 at p.2.
. The complaint states at p. 2 that CW4
worked at Key as a Senior Director, Global Marketplace Performance Improvement, from April 2012 to July 2014. Prior to that position, CW4 was Senior Director, West Coast Marketplace Business Development at Key from August 2009 to March 2012. As Senior Director, Global Marketplace Performance Improvement, CW4 worked in a leadership role for the Company’s strategic, enterprise-wide business development initiatives. In that role, CW4 reported to: Guillermo Capacho, Senior Vice President of International, Global Business Development and Technology; Kim Clarke, Senior Vice President of Administration; and Jeff Skelly, Senior Vice President of Rig Services and Operations Support.
. The complaint at p. 2 states about CW1, first employed by Key in 2008, that his
responsibilities included created and managing the Company's human resources infrastructure (including policies and procedures, compensation, benefits, recruitment, talent management, and leadership development), both domestically and internationally. This CW reported to Kim Clarke, Senior Vice President of Administration, and Guillermo Capacho, Senior Vice president of International, Global Business Development and Technology.
. Defendants object that just because the January 2014 audit resulted in Key’s taking a $3.2 million pre-tax charge does not mean that something Defendants said in 2012 was false at that time. #49 at p. 23. Moreover, the audit involved Key’s “aggregate billings of $372 million under its contracts awarded by PEMEX to Key’s Mexican subsidiary in 2008 and 2009' (Ex. 14, Jan. 6, 2014 Press Release at 1), which included aggregate billings back
. In their motion to dismiss (#49 at p.8 n.2, citations omitted), Defendants explain, When the purchase price of a company or an asset ... exceeds the book value of its assets, the difference is recorded as goodwill, an intangible asset that is not amortized or depreciated.... ([In other words, goodwill is] the "excess of the purchase price over its book value,” which is an “intangible asset for accounting purposes”).... "Goodwill must 'be tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of a reporting unit. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any.” .... Key tested its Russian reporting unit every year from 2010 to 2013 and consistently found that the fair value of the unit exceeded the carrying value.... June 2014 is the first time that Key found that impairment had occurred and calculated a corresponding charge. Notably, Plaintiff does not allege that Key was required to take an impairment charge any sooner than it did.
. The complaint asserts similar allegations by Defendant Wilson during a November 1, 2012 earnings call. #37 ¶ 168.
Defendants object that such statements by them are “generalized, optimistic statements and expressions of opinion that courts consistently have held to be inactionable puffery.” #49 at p. 23, citing Southland,
. Section 304 of the Sarbanes-Oxley Act, 15 U.S.C. § 7241(a), requires the CEOs and CFOs of publicly traded companies to certify quarterly and annually as 'to the accuracy of their SEC filings and effectiveness of their internal control over financial reporting. Shaw Group,
The Court notes that in Shaw Group, approving and relying on Garfield v. NDC Health Corp.,
To hold otherwise would mean that "scien-ter would be established in every case where there was an accounting error or auditing mistake made by a publicly traded company, thereby eviscerating the pleading requirements set forth in the PSLRA.... Instead, the court held that "a Sarbanes-Oxley certification is only probative of scienter if the person signing the certification was severely reckless in certifying the accuracy of the financial statements.” There must be, in other words, facts establishing that the officer who signed the certification had "a reason to know, or should have suspected, due to the presence of glaring accounting irregularities or other 'red flags,' that the financial statements contained material misstatements or omissions.”
Id. at 545 (citations to Garfield omitted). Lead Plaintiff has not provided facts showing "glaring accounting irregularities or other 'red flags' " that would imply that the certifier(s) had “reason to know or should have suspected” that "the financial statements contained material misstatements or omissions,” also never identified, regarding any of the certifications referenced in the complaint.
. Defendants point out that ¶ 151 of the complaint’s allegations that Key’s internal investigations "include[d] a review of certain aspects of the Company’s operations in Colombia” occurred after the Class Period and are not relevant.
. As examples Defendants list the following: (1) the Code establishes "high standards of ethics and legal behavior for all employees and officers”; (2) the FCPA "prohibits payments to foreign officials for the purpose of obtaining or keeping business”; (3) "It is our policy that the Company, as well as each person or entity acting as a representative or advisor to the Company, shall fully comply with all applicable provisions of the FCPA”; and (4) "Improper gifts, payments or offerings of anything of value to foreign officials could jeopardize the growth and reputation of the Company, and will not be tolerated.”). #37, ¶¶ 94-99. The complaint asserts such statements were false and misleading because Defendants, at the time the statements were made, were aware of and/or recklessly disre
. The Manual requires all employees to sign a Certificate of Compliance that contains the following statement: "I AGREE TO PROMPTLY CALL THE FCPA COMPLIANCE OFFICER AND PROVIDE A WRITTEN REPORT TO THE FCPA COMPLIANCE OFFICER FULLY DESCRIBING ANY CIRCUMSTANCES OF WHICH I AM AWARE THAT APPEAR TO BE IN VIOLATION OR A POTENTIAL VIOLATION.” Ex. 22 at p. 22.
. The only contact or communication of a CW with an Individual Defendant was in January 2014, when CW4 reported receiving a call from Defendant Wilson about the termination of Key’s Senior Vice President International, Global Business Dévelopment & Technology ("SVP International”), to whom CW4 reported. CW4 purportedly claimed that Wilson said, "you can’t ask me any questions as to why, but [SVP International] is no longer with the company and you will be reporting to [another Senior Vice President].” Complaint, #37 ¶ 139. Defendants note that the significance of this fact is unclear from the pleading and Wilson’s comment does not demonstrate anything fraudulent on its face or show Wilson had scienter regarding any statement that the complaint alleges was false when he made it.
. In a footnote, Defendants provide three more reasons why the statements in the Code and Manual are not actionable under Section 10(b) and Rule 10b-5. First, they are merely confirmatory because they were in place years ago (the Manual came out in June 2008, the Code in April 2009) and the Fifth Circuit long ago held that statements confirmatory of prior statements cannot be the basis of securities fraud claims. See Greenberg v. Crossroads Sys., Inc.,
. Defendants also note that "the vast majority of the challenged statements were precisely the kind of generalized, optimistic, and forward-looking statements and expressions of opinion that courts consistently have held to be inactionable puffery.” #49, p. 20 n.13.
. In accord, Meyer,
. “A plaintiff must prove that the misstatements — not 'other intervening causes such as 'changed circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events' — were the cause of her economic injury, unaided by any presumptions attending efforts to prove transaction causation.” Ludlow v. BP, P.L.C.,
. There must be sufficient allegations that there was a causal connection between the defendant's material misrepresentation and the plaintiff's economic loss, e.g., that the market had a negative reaction to the corrective disclosure that revealed the falsity of the defendant's representation. Dura Pharmaceuticals, Inc. v. Broudo,
. Defendants have attached copies of all SEC Forms they reference to their motion to dismiss.
. See, e.g., In re Franklin Bank Corp. Sec. Litig.,
. The complaint also states that he attended two other conferences (the Pritchard Capital Energize Conference in San Francisco, California on January 4, 2012 and the Raymond James Institutional Investors Conference in Orlando, Florida on March 6, 2012), but does not allege that he made any misstatements at them.