In re Osg Sec. Litig.

971 F.Supp.2d 387

In re OSG SECURITIES LITIGATION.

No. 12 Civ. 7948(SAS).

United States District Court, S.D. New York.

Sept. 10, 2013.

Samuel H. Rudman, Esq., David A. Rosenfeld, Esq., Mark T. Millkey, Esq., Christopher M. Barrett, Esq., Robbins Geller Rudman & Dowd LLP, Melville, NY, for Lead Plaintiffs.

Lewis J. Liman, Esq., Elizabeth Vicens, Esq., Cleary Gottlieb Steen & Hamilton, LLP, New York, NY, for Defendant Overseas Shipholding Group, Inc.

Scott B. Schreiber, Esq., Craig A. Stewart, Esq., Arnold & Porter, Washington, DC, for Defendant Morten Arntzen.

David H. Kistenbroker, Esq., Joni S. Jacobsen, Esq., Ashley J. Burden, Esq., Neil A. Steiner, Esq., Dechert LLP, Chicago, IL, for Defendant Myles R. Itkin.

Richard A. Rosen, Esq., Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Consolidated Defendants G. Allen Andreas, III, Alan R. Batkin, Thomas P. Coleman, Charles A. Fribourg, Stanley Komaroff, Solomon N. Merkin, Joel I. Picket, Ariel Recanati, Oudi Recanati, Thomas F. Robards, Jean–Paul Vettier, Michael J. Zimmerman.

Adam Selim Hakki, Esq., Daniel Hector Rees Laguardia, Esq., Stuart Jay Baskin, Esq., Shearman & Sterling LLP, New York, NY, for Consolidated Defendants Citigroup Global Markets Inc, Deutsche Bank Securities Inc., Goldman, Sachs & Co., HSBC Securities (USA) Inc., ING Financial Markets, LLC, Morgan Stanley & Co. LLC (f/k/a Morgan Stanley & Co. Incorporated), DNB Markets, Inc. (f/k/a DnB NOR Markets, Inc.).

Jamie Lynne Wine, Esq., Miles Norman Ruthberg, Esq., Kevin Michael McDonough, Esq., Latham & Watkins, LLP, New York, NY, for Consolidated Defendant PriceWaterhouseCoopers LLP.

Stanley J. Parzen, Esq., Mayer Brown LLP (Chicago), Chicago, IL, for Consolidated Defendant Ernst & Young.

OPINION AND ORDER

SHIRA A. SCHEINDLIN, District Judge:

I. INTRODUCTION

Lead Plaintiffs Stichting Pensioenfonds DSM Nederland (“DSM”), Indiana Treasurer of State, and Lloyd Crawford (together, “Plaintiffs”), bring this action on behalf of themselves and others similarly situated on the basis of a March 2010 Senior Notes Offering (“the Offering”) by Overseas Shipholding Group, Inc. (“OSG” or “the Company”). OSG filed for bankruptcy on November 14, 2012, and is not a party to this action.¹

Plaintiffs name the following parties as defendants: Morten Arntzen ², Myles R. Itkin ³, G. Allen Andreas III, Alan R. Batkin, Thomas B. Coleman, Charles Fribourg, Stanley Komaroff, Solomon N. Merkin, Joel I. Picket, Ariel Recanati, Oudi Recanati, Thomas F. Robards, Jean–Paul Vettier, and Michael Zimmerman ⁴ (collectively, the “Individual Defendants”); PncewaterhouseCoopers LLP (“PwC”) and Ernst & Young (“E & Y”) (collectively, the “Auditor Defendants”); and Citigroup Global Markets Inc., Deutsche Bank Securities Inc., DNB Markets, Inc. (f/k/a DnB NOR Markets, Inc.), Goldman, Sachs & Co., HSBC Securities (USA) Inc., ING Financial Markets LLC, and Morgan Stanley & Co. LLC (f/k/a Morgan Stanley & Co. Incorporated) (collectively, the “Underwriter Defendants”).⁵

The Class consists of all persons and entities who purchased OSG Senior Notes pursuant to and/or traceable to the Offering, as well as purchasers of OSG securities between March 1, 2010 and October 19, 2012, inclusive (the “Class Period”).⁶

Plaintiffs assert claims under the following statutes: 1) Section 11 of the Securities Act of 1933 (“Securities Act”) against all Defendants,⁷ 2) Section 12(a)(2) of the Securities Act against the Individual Defendants and the Underwriter Defendants,⁸ 3) Section 15 of the Securities Act against the Individual Defendants,⁹ 4) Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b–5 against Arntzen and Itkin, ¹⁰ and 5) Section 20(a) of the Exchange Act against Arntzen and Itkin. ¹¹

In April and May of 2013, four different motions to dismiss were filed pursuant to Federal Rule of Civil Procedure 12(b)(6). Ernst & Young (“E & Y”) and PricewaterhouseCoopers LLP (“PwC”), the two Auditor Defendants, each filed a motion to dismiss, as did the Underwriter Defendants and the Individual Defendants. For the reasons that follow, the motions by E & Y, PwC, and the Underwriter Defendants are denied in full, while the motion by the Individual Defendants is granted in part and denied in part.

II. BACKGROUNDA. OSG's Business Operations and Tax Liability

OSG is a tanker company with a fleet of over one hundred vessels operating both domestically and internationally.¹² The international fleet, which constitutes about seventy-five percent of the Company's vessels, is owned and operated entirely by foreign subsidiaries of OSG International, Inc. (“OIN”), a wholly owned subsidiary of OSG.¹³ From 1987 to 2004, OSG was required to pay United States income taxes on the shipping income of its foreign subsidiaries, including OIN.¹⁴ However, after the passage of the American Jobs Creation Act of 2004 (the “Jobs Act”), OSG reported that it was no longer required to pay taxes on undistributed foreign shipping income earned by its subsidiaries.¹⁵

Another tax provision relevant to OSG is Section 956 of Section F of the Internal Revenue Code. Section 956 provides that, when a foreign subsidiary guarantees the loans of a United States parent company, the “accumulated ‘earnings and profits' of that subsidiary are deemed to have been distributed to the U.S. parent company” and are thereby subject to United States federal income taxation.¹⁶ Plaintiffs allege that OSG entered into various debt arrangements for which OIN was jointly and severally liable, thereby triggering millions of dollars in income tax liability under Section 956.¹⁷

B. The Offering

On March 24, 2010, OSG conducted a public offering of three hundred million dollars of unsecured notes.¹⁸ In connection with the Offering, OSG filed a Shelf Registration Statement and Prospectus dated March 22, 2010 (the “Registration Statement”) and a Prospectus Supplement dated March 24, 2010 (the “Prospectus”), among other preliminary filings.¹⁹ Each of the Individual Defendants signed the Registration Statement.²⁰ None of the filings or incorporated financial statements disclosed the alleged tax liability under Section 956.²¹

C. The Role of the Auditors

The Registration Statement and Prospectus incorporated the Company's 2009 Form 10–K by reference, and thereby the Company's financial statements from 2007, 2008, and 2009.²² E & Y served as OSG's independent registered public accounting firm from 1969 through June 15, 2009, and audited OSG's financial statements from 2005 through 2008.²³ E & Y concluded that “the financial statements [from 2007 and 2008] ... present fairly, in all material respects, the consolidated financial position of Overseas Shipholding Group, Inc. and subsidiaries....” ²⁴

PwC served as OSG's independent registered public accounting firm from June 17, 2009 to the present, and audited OSG's financial statements for 2009. ²⁵ PwC's audit opinion indicated that the 2009 financial statements “present fairly, in all material respects, the financial position of Overseas Shipholding Group, Inc. and its subsidiaries....” ²⁶ PwC also concluded that “the Company maintained, in all material respects, effective internal control over financial reporting.” ²⁷ Both firms “expressly consented to having their unqualified audit opinions for OSG's financial statements [for years 2007 through 2009] incorporated by reference into the Registration Statement.” ²⁸

D. The Road to Bankruptcy

On October 3, 2012, Defendant Andreas resigned from his position on OSG's Board of Directors and Audit Committee.²⁹ Andreas's resignation letter stated: “My resignation results from a disagreement with the Board as to the process the Board is taking in reviewing a tax issue. In taking this action, I urge you to report this issue to our auditors, PricewaterhouseCoopers LLP, prior to the Company disclosing my resignation with the SEC.” ³⁰

On October 22, 2012, OSG filed a Form 8–K with the SEC indicating that its previously issued financial statements for “at least three years ended December 31, 2011 ... should no longer be relied upon.” ³¹ Later that day, S & P lowered OSG's credit rating based on the “high probability of very near-term default.” ³² On November 14, 2012, OSG filed for bankruptcy protection.³³ In connection with that proceeding, the Internal Revenue Service filed a Proof of Claim stating that OSG owes the federal government over thirty-five million dollars in corporate income tax plus 13.7 million dollars in interest, which were accrued during 2004, 2005, 2009, 2010, and 2011.³⁴

III. STANDARD OF REVIEW AND PLEADING STANDARDA. Rule 12(b)(6) Motion to Dismiss

In deciding a motion to dismiss pursuant to Rule 12(b)(6), the court must “accept[ ] all factual allegations in the complaint as true, and draw[ ] all reasonable inferences in the plaintiff's favor.” ³⁵ The court “may consider the facts alleged in the complaint, documents attached to the complaint as exhibits, and documents incorporated by reference in the complaint.” ³⁶

The court evaluates the sufficiency of the complaint under the “two-pronged approach” suggested by the Supreme Court in Ashcroft v. Iqbal.³⁷ Under the first prong, a court may “begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth.” ³⁸ For example, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” ³⁹ Under the second prong of Iqbal, “[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief.” ⁴⁰ A claim is plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” ⁴¹ “The plausibility standard is not akin to a probability requirement” because it requires “more than a sheer possibility that a defendant has...