United States District Court, D. Arizona
In re Nuverra Environmental Solutions Securities Litigation. This Document Relates to: All Actions.
ORDER AND OPINION
[RE: MOTION AT DOCKET 49]
JOHN W. SEDWICK, Senior District Judge.
I. MOTION PRESENTED
At docket 49, defendants Nuverra Environmental Solutions, Inc., Richard J. Heckmann, Mark D. Johnsrud, Jay Parkinson, W. Christopher Chisholm, and Charles R. Gordon move pursuant to Federal Rule of Civil Procedure 12(b)(6) for an order dismissing plaintiffs' complaint. Plaintiffs respond at docket 54. Defendants filed a reply at docket 56. Oral argument was requested but would not assist the court.
At docket 43 plaintiffs filed an 83-page, two-count Consolidated Class Action Complaint alleging federal securities law violations. According to the complaint, Nuverra "is an environmental solutions company focused on serving the needs of exploration and production (E&P') companies in their pursuit of shale oil and gas hydraulic fracturing drilling (also known as fracking')." Fracking is a drilling procedure whereby oil and natural gas is harvested from shale rock formations up to thousands of feet underground by pumping large quantities of fluids at high pressure into the targeted rock. Nuverra "handles the logistics of delivering-and then removing and disposing of-the millions of gallons of water needed to operate each fracking well."
Plaintiffs' complaint centers around two alleged events. First, plaintiffs allege that Nuverra's truck drivers engaged in an illicit bill padding scheme that artificially boosted Nuverra's earnings. Second, plaintiffs allege that Nuverra entered into an unprofitable business deal in early 2012 under which it provided its services at a below-market rate to E&P driller EOG Resources, Inc. at the Eagle Ford basin in Texas. Nuverra hoped that this deal would allow it to "build a book of south Texas E&P customers" but, instead, Nuverra's "profitability immediately tanked." As discussed in more detail below, plaintiffs allege that defendants misled the investing public by making positive statements about the company without disclosing that Nuverra's profits were being unsustainably propped up by the bill padding scheme and because the EOG Resources deal was actually causing it to lose substantial sums of money at the Eagle Ford site. Plaintiffs allege that these false statements and misleading omissions artificially inflated the price of Nuverra's publicly traded securities in violation of federal law.
Defendants now move for dismissal of the complaint in its entirety. Plaintiffs maintain that the complaint is sufficient, but request leave to amend if the court holds otherwise.
III. STANDARD OF REVIEW
Rule 12(b)(6), tests the legal sufficiency of a plaintiff's claims. In reviewing such a motion, "[a]ll allegations of material fact in the complaint are taken as true and construed in the light most favorable to the nonmoving party." To be assumed true, the allegations "may not simply recite the elements of a cause of action, but must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively." Dismissal for failure to state a claim can be based on either "the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." "Conclusory allegations of law... are insufficient to defeat a motion to dismiss."
To avoid dismissal, a plaintiff must plead facts sufficient to "state a claim to relief that is plausible on its face." "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." "The plausibility standard is not akin to a probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully." "Where a complaint pleads facts that are merely consistent with' a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief.'" "In sum, for a complaint to survive a motion to dismiss, the non-conclusory factual content, ' and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief."
A. The Alleged Section 10(b) and Rule 10b-5 Violation
Count I of plaintiffs' complaint alleges a violation of Section 10(b) of the Securities Exchange Act of 1934. Section 10(b) "forbids (1) the use or employ[ment]... of any... deceptive device, ' (2) in connection with the purchase or sale of any security, ' and (3) in contravention of' Securities and Exchange Commission rules and regulations.'" SEC Rule 10b-5, promulgated under the authority of Section 10(b), specifically forbids, among other things, making untrue statements of material facts or omitting material facts "necessary in order to make the statements made... not misleading." In order to state a claim under Section 10(b) and Rule 10b-5, a plaintiff must allege the following five elements: (1) a material misrepresentation (or omission); (2) scienter; (3) "a connection with the purchase or sale of a security;" (4) transaction and loss causation; and (5) economic loss. Defendants' motion to dismiss challenges the first two elements, which must be pled with particularity.
Federal Rule of Civil Procedure 9(b) states that all allegations of fraud or mistake must "state with particularity the circumstances constituting fraud or mistake." Further, the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which Congress enacted "[a]s a check against abusive litigation by private parties, " contains pleading requirements that are more exacting than Rule 9's. They require plaintiffs to state with particularity not only the allegedly misleading statements and omissions, but also scienter. With regard to misleading statements, the PSLRA requires the plaintiff's complaint to "specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading." With regard to scienter, the PSLRA requires the plaintiff to state "facts giving rise to a strong inference that the defendant acted with the required state of mind." The Ninth Circuit has combined the PSLRA's dual pleading requirements into ...