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In re Nuverra Environmental Solutions Securities Litigation

United States District Court, D. Arizona

March 12, 2015

In re Nuverra Environmental Solutions Securities Litigation. This Document Relates to: All Actions.

ORDER AND OPINION [Re: Motion at Docket 62]

JOHN W. SEDWICK, Senior District Judge.

I. MOTION PRESENTED

At docket 62 plaintiffs Jewyl A. Stevens, et al. (collectively, "plaintiffs") move for leave to amend their complaint pursuant to Federal Rule of Civil Procedure 15(a)(2). Defendants Nuverra Environmental Solutions, Inc., et al. (collectively, "Nuverra") oppose at docket 63. Plaintiffs reply at docket 66. Oral argument was requested but would not assist the court.

II. BACKGROUND

At docket 43 plaintiffs filed an 83-page, two-count Consolidated Class Action Complaint ("Complaint") alleging federal securities law violations. Count I alleges violations of Section 10(b) of the Securities Exchange Act of 1934 ("the Act") and SEC Rule 10b-5; Count II alleges violations of Section 20(a) of the Act. 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')."[1] 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.[2] Nuverra "handles the logistics of delivering-and then removing and disposing of-the millions of gallons of water needed to operate each fracking well."[3]

The 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.[4] Second, plaintiffs allege that Nuverra entered into an unprofitable "sweetheart" business deal in early 2012 under which it provided its services at a below-market rate to E&P driller EOG Resources, Inc. ("EOG") at the Eagle Ford basin in Texas.[5] Nuverra hoped that this deal would allow it to "build a book of south Texas E&P customers"[6] but, instead, Nuverra's "profitability immediately tanked."[7] The Complaint alleges 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 deal was actually causing it to lose substantial sums of money at the Eagle Ford site. The Complaint also alleges that these false statements and misleading omissions artificially inflated the price of Nuverra's publicly traded securities in violation of federal law.

At docket 61 the court dismissed the Complaint pursuant to Rule 12(b)(6) for failure to state a claim. The court held that plaintiffs' Count I violations are not pled with sufficient particularity to comply with Rule 9(b) or the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), and that this deficiency also dooms plaintiffs' Count II allegations. Dismissal was entered without prejudice to plaintiffs' ability to move to amend the Complaint.

Plaintiffs' motion to amend is currently before the court. Their 77-page proposed Amended Complaint ("PAC") is at docket 62-1, which is accompanied at docket 62-3 by a 28-page appendix of 49 allegedly false and misleading statements made by Nuverra.

III. STANDARD OF REVIEW

Rule 15(a) states that if the period for amending a pleading as a matter of course has expired "a party may amend its pleading only with the opposing party's written consent or the court's leave." "The court should freely give leave when justice so requires."[8] Rule 15 provides for a very liberal amendment policy.[9] The decision to permit or deny a motion for leave to amend rests within the sound discretion of the trial court.[10] In deciding whether to grant leave to amend under Rule 15(a), courts generally consider the following factors: undue delay, bad faith by the moving party, prejudice to the opposing party, futility of amendment, and whether the party has previously amended his pleadings.[11] "Generally, this determination should be performed with all inferences in favor of granting the motion."[12] The party opposing amendment bears the burden of demonstrating a permissible reason for denying the motion to amend.[13] Motions for leave to amend should be denied, however, where they appear futile or legally insufficient.[14]

IV. DISCUSSION

The court dismissed the Complaint because it fails to link any of the allegedly misleading statements with a specific reason or reasons why the statements are misleading and insufficiently alleges scienter regarding the bill padding scheme. Plaintiffs argue that the PAC cures these deficiencies in two main ways. First, the PAC's appendix lists 49 allegedly misleading statements and provides corresponding reasons why the statements are false and/or misleading. Second, the PAC includes substantive facts from four confidential witnesses that enhance the specificity with which scienter is pled.

In opposition, Nuverra does not dispute that the PAC now links each misleading statement with a purported reason why that statement is misleading. Instead, Nuverra argues that granting plaintiffs leave to file the PAC would be futile because the new facts from plaintiffs' confidential witnesses are unreliable, the PAC ...


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