Plagens v. Deckard

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WILLIAM PLAGENS, et al., Plaintiffs, v. JENNIFFER D. DECKARD, et al., Defendants.

No. 1:20-cv-2744

United States District Court, N.D. Ohio, Eastern Division

March 30, 2023

Thomas M. Parker Magistrate Judge

OPINION AND ORDER

J Philip Calabrese United States District Judge Northern District of Ohio

Lead Plaintiff Dr. Thomas Phelps seeks to recover on behalf of a putative class for alleged violations of federal securities laws. Defendants Jenniffer Deckard, Mark Barrus, Michael Biehl, Andrew Eich, and Richard Navarre, all of whom served as officers of Covia Holdings Corporation or its predecessors, principally Fairmount Santrol Holdings Inc. move to dismiss the consolidated amended complaint. For the reasons that follow, the Court GRANTS IN PART and DENIES IN PART Defendants' motion to dismiss.

STATEMENT OF FACTS

Taking the facts alleged in the consolidated amended complaint as true and construing them in favor of the non-moving party, as the Court must in the present procedural posture, Plaintiff bases his claims in this putative class action on the following facts and defines the class period as running from March 10, 2016 through June 29, 2020. (ECF No. 50, ¶ 1 PageID #1066.)

A. The Company's Products

When it became a publicly traded company in October 2014, Fairmount Santrol's shares traded on the New York Stock Exchange. (Id., ¶ 28, PageID #1073.) Effective June 1, 2018, Fairmount Santrol merged with Unimin Corporation to form Covia Holdings Corporation. (Id., ¶¶ 28-29, PagelD #1073.) In the merger, shareholders received $0.73 in cash consideration and 0.2 shares of Covia stock for each Fairmount Santrol share held at the time of the merger. (Id.) For the sake of convenience in this ruling, when the Court refers to the Company or Covia, it includes Covia, Fairmount Santrol, and Unimin.

Plaintiff's allegations arise in the context of the hydraulic fracturing space, commonly known as fracking. (Id., ¶ 2, PageID #1066; see also id., ¶ 39, PageID #1075.) Hydraulic fracturing injects large quantities of water, chemicals, and sand at high pressure into a wellbore to create cracks in rock formations, allowing oil and gas trapped within to flow more freely. (Id., ¶¶ 39 & 40, PageID #1075-76.) Specifically, Fairmount Santrol sold sand and sand-based products to oil and gas companies, which used these materials in fracking operations. (Id., ¶ 2, PageID #1066.) The Company's chief product was Northern White sand, which is not at issue in this case. (Id., ¶ 43, PageID #1076.) Instead, this case involves value-added products known as proppants, which prop open fractures in rock formations promoting the flow of hydrocarbons (oil and gas) through wells, that the Company marketed as having higher conductivity than traditional sand. (Id., ¶¶ 40, 42 & 44, PageID #1076.) Conductivity provides a key measure of proppant performance, and higher conductivity means that more oil and gas can be extracted from a well. (Id., ¶¶ 2 & 42, PageID #1066 & #1076.)

In the early 2010s, hydraulic fracturing expanded in the United States, creating a booming oil and gas industry and significant demand for sand for use as a proppant. (Id., ¶ 41, PageID #1076.) According to the consolidated amended complaint, Fairmount Santrol and later Covia attempted to differentiate itself in the market with high-quality and value-added proppants. (Id., ¶ 3, PageID #1066-67; see also id., ¶¶ 43-45, PageID #1076-77.) It invested heavily in developing these products and sought to sell them at a premium. (Id., ¶¶ 44 & 49, PageID #1067 & #1078.) Plaintiff focuses on three of the Company's value-added proppant products in particular:

(1) PowerProp, a premium resin-coated sand;

(2) Propel SSP, a gel-coated sand compatible with freshwater that the Company touted as delivering proppants further into the ground to increase oil and gas production; and

(3) Propel SSP 350, a version of Propel SSP compatible with almost any type of water.

(Id., ¶ 4, PageID #1067; id., ¶¶ 46-51, PageID #1077-78.) But these were not the Company's only value-added proppants. (See ECF No. 51-3, PageID #1320.)

B. The Company's Business Strategy

Generally, the Company told investors that its long-term strategy included developing and commercializing value-added proppant products. (ECF No. 50, ¶ 3, PageID #1066-67; id., ¶ 45, PageID #1077.) As one example of the market advantages for the Company of these premium products, a confidential witness-a former employee who served as a senior district sales manager from 2017 through March 2020 and whom the consolidated amended complaint references as FE2 (id., ¶ 35, PageID #1075)-reports that PowerProp sold for approximately $250 per ton, compared to the $100 per ton base commodity price for Northern White Sand, or prices as low as $8 per ton for local sand (id., ¶ 44, PageID #1076). The Company first introduced PowerProp in 2010. (Id., ¶ 47, PageID #1077; ECF No. 51-3, PageID #1320.)

According to the consolidated amended complaint, the Company acquired the right to use Propel SSP in 2013 for approximately $55 million and spent more than $58 million toward its development. (ECF No. 50, ¶ 49, PageID #1078; ECF No. 50-1, ¶ 32, PageID #1132.) Further, it avers that PowerProp and Propel SSP accounted for 6.6% of the Company's revenue for its proppant segment in 2014, dropping to 4% in 2017. (ECF No. 50, ¶ 52, PageID #1078; ECF No. 50-1, ¶ 12, PageID #1130.) In 2016, these products accounted for 7.8% of the Company's total profit margin, and they accounted for 4.75% of that margin in 2017. (Id.)

Internally, the Company tracked the tons sold and average selling price of these products, and considered them a key component in its profit and loss metrics. (ECF No. 50, ¶ 53, PageID #1078; ECF No. 50-1, ¶ 12, PageID #1130; see also ECF No. 50, ¶¶ 187 & 191, PagelD #1113-14 & #1115.) Externally, market analysts who covered the Company followed and discussed these proppant products and their commercial prospects. (ECF No. 50, ¶ 54, PageID #1078; ECF No. 50-1, ¶ 13, PageID #1130.)

To illustrate the market's focus on the Company's statements and reports about these productions, the consolidated amended complaint outlines four examples:

• On May 19, 2016, the Company held an event for investors and analysts at which it made statements about Propel SSP. (ECF No. 50, ¶ 55, PageID #1078-79.) The next day, an analyst from Wells Fargo credited Fairmount Santrol's claims: “we see potential upside from the Company's self-suspending proppant ‘Propel SSP,' which has been successful in increasing production (30%) compared to offset wells in trials with nearly 20 E&Ps and over 90 wells.” (Id.) A few days later, an analyst from Jefferies noted the potential upside of Propel SSP as well. (Id., ¶ 56, PageID #1079.)

• Two analysts in March 2017 provided favorable reports on the Company. On March 9, 2017, an analyst report from Wells Fargo noted increasing demand for resin-coated products that prompted the Company to reopen a facility. (Id., ¶ 59, PageID #1079-80.) On March 27, 2017, a report from Guggenheim Securities pointed to the Company's value-added products and unique proppant technology “that could take off and provide an additional avenue of growth.” (Id., ¶ 60, PageID #1080.) That report also relied on statements from the Company about Propel SSP, including that the Company “believes the production uplift [from Propel SSP] is usually at least 30%.” (Id., ¶ 61, PageID #1080.)

• On November 5, 2017, an analyst report from the energy specialists of Piper Jaffray noted that the Company's management touted Fairmount Santrol's products: “value-added proppant, especially Propel SSP, has been a component of the company's product suite that management has long touted,” leading the analyst to “believe the increased commercialization of Propel SSP influenced quarterly results. Modeling sales of the product is difficult but we are increasing our estimates and price target largely under the assumption that value added proppant volumes and revenues continue to improve in the [future].” (Id., ¶ 57, PageID #1079.) In that same report, the analyst increased its price target “due largely to increased value added proppant volume.” (Id.)

• Between May 2017 and May 2019, analyst reports from Morningstar Equity Research included favorable projections for the Company based on sales of Propel SSP, which the reports said “could be a blockbuster seller, as it holds promise of dramatically reducing well costs while increasing well productivity.” (Id., ¶ 58, PageID #1079.)

C. Allegedly False Statements

The consolidated amended complaint points to “numerous false and misleading claims” about PowerProp, Propel SSP, and Propel SSP 350 before and during the class period, which covers the time from March 10, 2016 through June 29, 2020. (Id., ¶¶ 1 & 62, PageID #1066 & #1080.)

C.1. Before the Class Period (March 10, 2016)

Fairmount Santrol did not sell ceramic products for hydraulic fracturing. (ECF No. 50-1, ¶ 3, PageID #1128.) Plaintiff maintains that the Company misrepresented that the performance of PowerProp was comparable to lightweight ceramics, which “are higher-performing, more expensive proppant products” compared to sand. (ECF No. 50, ¶ 63, PageID #1080.)

Plaintiff points to representations to this effect that Fairmount Santrol made to analysts in an August 2014 presentation, a road-show presentation from September 2014 and Fairmount Santrol's registration statement with the Securities and Exchange Commission in connection with its initial public offering. (Id., ¶¶ 64-66, PagelD #1080-81; see also ECF No. 50-1, ¶¶ 16-18, PagelD #1130.) Beginning in 2014, Fairmount Santrol posted data purportedly supporting this claim on its website. (ECF No. 50, ¶ 68, PageID #1081; EC...