Northumberland Cnty. Ret. Sys. v. Kenworthy

NORTHUMBERLAND COUNTY RETIREMENT SYSTEM, et al., Plaintiffs, v. KEN L. KENWORTHY, JR., et al., Defendants.

NO. CIV-11-520-D

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF OKLAHOMA

Dated: September 16, 2013

ORDER

Before the Court are three separate motions [Doc. Nos. 115, 116, and 117] to dismiss the Amended Class Action Complaint ("Amended Complaint"). Each motion seeks dismissal pursuant to Fed. R. Civ. P. 12(b)(6), arguing the Amended Complaint fails to state a plausible claim for relief. Lead Plaintiffs¹ timely responded, and replies were filed in support of two of the motions. The motions are fully briefed and at issue. Because all movants assert the same primary arguments in support of dismissal, all motions are addressed in this Order. Where a movant asserts an argument limited only to the claims asserted against it, that contention is also addressed as noted herein.

I. Background:

In this action, Lead Plaintiffs assert claims based on alleged violations of the Securities Act of 1933 (the "1933 Act"), 15 U. S. C. § § 77k, 77l, and 77o. They seek to represent a putative class consisting of all purchasers of GMX Resources, Inc. ("GMX") common stock pursuant to, or traceable to, GMX's public offerings in May 2009 and October 2009. The action was filed in theDistrict Court of Oklahoma County and removed to this Court. Lead Plaintiffs filed a motion to remand, which was denied in a November 16, 2011 Order [Doc. No. 69].

On August 17, 2012, Lead Plaintiffs filed the Amended Complaint [Doc. No. 114], asserting three claims for relief: 1) a claim alleging that all defendants violated Section 11 of the 1933 Act; 2) a claim alleging that GMX and the underwriters of the offerings² violated Section 12(a)(2) of the 1933 Act; and 3) a claim that Defendants Ken L. Kenworthy, Jr. ("Kenworthy") and James A. Merrill ("Merrill") are liable as controlling persons of GMX for the claimed violation of Section 11 of the 1933 Act.

GMX, Kenworthy, and Merrill jointly filed a motion to dismiss [Doc. No. 115] the Amended Complaint. Defendant Smith Carney & Co., P.C. ("Smith Carney") separately moved to dismiss [Doc. No. 116] the claims asserted against it, and the underwriter defendants also filed a motion to dismiss [Doc. No. 117]. Lead Plaintiffs filed a combined response to the motions filed by GMX, Kenworthy, and Merrill and the underwriter defendants' motion, and those movants filed replies. Lead Plaintiffs filed a separate response to Smith Carney's motion.

Subsequent to the completion of all briefing on the motions to dismiss, GMX filed a notice of bankruptcy [Doc. No. 131], invoking the automatic stay. Accordingly, the Court took no action on the pending motions. However, on July 17, 2013, the parties filed a Stipulation of Dismissal [Doc. No. 132] in which they stipulated to the dismissal with prejudice of all claims asserted against GMX in this action. Accordingly, the motion to dismiss is rendered moot as to GMX and need notbe addressed by the Court. The Stipulation of Dismissal does not, however, dismiss the claims against Kenworthy and Merrill, the underwriter defendants, or Smith Carney. Accordingly, the motions asserted by those defendants remain pending.

II. Standards governing Rule 12(b)(6) motions:

To avoid dismissal pursuant to Rule 12(b)(6), a complaint "must contain enough factual allegations 'to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007); Robbins v. Oklahoma, 519 F. 3d 1242, 1247 (10^th Cir. 2008). To state a plausible claim, a plaintiff has the burden to frame a "complaint with enough factual matter (taken as true) to suggest" that he is entitled to relief. Robbins, 519 F. 3d at 1247.) "Factual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U. S. at 555. Thus, plaintiffs must allege sufficient facts to "nudge[ ] their claims across the line from conceivable to plausible." Id. at 570; Robbins, 519 F. 3d at 1247. The "mere metaphysical possibility that some plaintiff could prove some set of facts in support of the pleaded claims is insufficient; the complaint must give the court reason to believe that this plaintiff has a reasonable likelihood of mustering factual support for these claims." Ridge at Red Hawk, L.L.C. v. Schneider, 493 F. 3d 1174, 1177 (10^th Cir. 2007) (emphasis in original). Although the Court must construe well-pleaded facts as true, not all factual allegations are "entitled to the assumption of truth." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The Court need not accept as true the assertions in a complaint which "amount to nothing more than a 'formulaic recitation of the elements'" of a claim. Id. (quoting Twombly, 550 U.S. at 554-555).

The question to be decided is "whether the complaint sufficiently alleges facts supporting all the elements necessary to establish an entitlement to relief under the legal theory proposed."Lane v. Simon, 495 F.3d 1182, 1186 (10th Cir. 2007) (internal quotation marks omitted). A complaint need not recite "detailed factual allegations, but the factual allegations must be enough to raise the right to relief above the speculative level." Hall v. Witteman, 584 F.3d 859, 863 (10th Cir.2009) (internal quotation marks omitted). "[I]n ruling on a motion to dismiss, a court should disregard all conclusory statements of law and consider whether the remaining specific factual allegations, if assumed to be true, plausibly suggest the defendant is liable." Kan. Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10^th Cir. 2011).

Where a complaint alleges causes of action based on federal securities laws, the requirements of Twombly and Iqbal must be satisfied. In re IAC/InterActive Corp. Securities Litigation, 695 F. Supp. 2d 109, 117 (S.D.N.Y. 2010). Rule 12(b)(6) dismissals of securities claims "are difficult to obtain because the cause of action deals primarily with fact-specific inquiries such as materiality." In re SemGroup Energy Partners, L. P., 729 F.Supp. 2d 1276, 1286 (N. D. Okla.2010) (citing Grossman v. Novell, Inc., 120 F. 3d 1112, 1118 (10^th Cir. 1997)). However, "'courts do not hesitate to dismiss securities claims pursuant to Rule 12(b)(6) where the alleged misstatements or omissions'" are "'plainly immaterial.'" Id. (quoting Grossman, 120 F. 3d at 1118).

In analyzing a Rule 12(b)(6) motion to dismiss, a court may consider "documents incorporated into the complaint by reference, and matters of which a court may take judicial notice." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). Specifically, courts may take judicial notice of federally regulated filings, including SEC filings. In re Morgan Stanley Information Fund Securities Litig., 592 F.3d 347, 355 n. 5 (2d Cir. 2010).

III. Application:

A. Essential allegations to support Section 11 and 12(2)(a) claims:

Section 11 of the 1933 Act "imposes civil liability on issuers and other signatories of a registration statement if the registration statement contains material misstatements or omissions and the plaintiffs acquired the securities without knowledge of such misrepresentations." McMahan & Co. v. Wherehouse Entertainment, 65 F. 3d 1044, 1047 (2d Cir.1995); Police and Fire Retirement System of City of Detroit v. SafeNet, Inc.,645 F.Supp.2d 210, 226 (S.D.N.Y.,2009). Section 11 provides a cause of action by the purchaser of the registered security against "the security's issuer, its underwriter, and certain other statutorily enumerated parties." In re Morgan Stanley Information Fund Securities Litigation, 592 F. 3d 347, 358 (2d Cir. 2010).

To state a claim for relief under Section 11, a plaintiff must allege: (1) he purchased a registered security, either directly from the issuer or in the aftermarket following the offering; (2) the defendants participated in the offering in a manner sufficient to give rise to liability under § 11; and (3) the registration statement "'contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading."' Id. at 358-59 (quoting 15 U. S. C. § 77k(a)).

Section 12(a)(2) of the 1933 Act provides for essentially the same cause of action as Section 11, but it applies only to claims based on alleged omissions or misstatements where the securities at issue were purchased from a "statutory seller." Pinter v. Dahl, 486 U. S. 622, 643-647 (1988). An individual is a "statutory seller" if he: 1) "passed title, or other interest in the security, to the buyer for value," or (2) "successfully solicit[ed] the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities' owner." Id. at 642, 647. Section 12(a)(2) establishes "an express privity requirement, giving a cause of action only to individuals who purchase securities directly from a person who sells the securities" at issue. Joseph v. Wiles,223 F.3d 1155, 1161 (10^th Cir. 2000). Thus, to state a claim under § 12(a)(2), a plaintiff must plead facts to show 1) the defendant is a "statutory seller"; 2) the "sale was effectuated by 'means of a prospectus or oral communication'"; and 3) "the prospectus or oral communication 'include[d] an untrue statement of a material fact or omit[ted] to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading.'" Morgan Stanley, 592 F. 3d at 359 (quoting 15 U. S. C. § 77l(a)(2)).

Although a securities claim sounding in fraud must also satisfy the Fed. R. Civ. P. 9(b) requirement that fraud be pled with particularity, Rule 9(b) scrutiny is not triggered where a claim arising under § 11 or § 12(a)(2) is not premised on fraud. Schwartz v. Celestial Seasonings, Inc., 124 F. 3d 1246, 1252 (10^th Cir. 1997). In this case, Lead Plaintiffs expressly state in the Amended Complaint that their claims are not based on fraud....