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IN RE WRT ENERGY SECURITIES LITIGATION

United States District Court, S.D. New York


February 8, 2005.

In re WRT ENERGY SECURITIES LITIGATION.

The opinion of the court was delivered by: JOHN KEENAN, Senior District Judge

OPINION AND ORDER

Before the Court are the motions to dismiss Plaintiffs' Fourth Amended Consolidated Class Action Complaint (the "Complaint"), pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b), of defendants Steven S. McGuire, Samuel C. Guy, Ronald E. Hale, Jr., Dominic Man-Kit Lam and James T. Rash (collectively, the "Individual Defendants"), and defendants Oppenheimer & Co., Inc. ("Oppenheimer") and Schroder & Co., Inc. ("Schroder") (collectively, the "Underwriter Defendants"). For the reasons set forth below, the motions are granted in part and denied in part.

PROCEDURAL HISTORY

  Plaintiffs commenced these consolidated actions on December 18, 1995 by filing two separate class action complaints in the United States District Court for the Southern District of California. Those actions subsequently were consolidated by Stipulation and Order dated May 2, 1996, and transferred to this Court by Order of United States District Judge Barry T. Moskowitz dated May 7, 1996.

  Plaintiffs filed an Amended Complaint on July 26, 1996 and a Second Amended Complaint on October 25, 1996. These complaints alleged claims under both the Securities Act of 1933 ("1933 Act") and the Securities Exchange Act of 1934 ("1934 Act"). The Court dismissed the 1933 Act claims on standing Page 2 grounds because Plaintiffs did not allege that they purchased their securities in a public offering. In re WRT Energy Sec. Litig., No. 96 Civ. 3610 (JFK), 96 Civ. 3611 (JFK), 1997 WL 576023 at *7 (S.D.N.Y. Sep. 15, 1997). The Court dismissed the 1934 Act claims on Rule 9(b) grounds. Id. at *12.

  Plaintiffs, who had leave to replead, filed a Third Amended Consolidated Class Action Complaint that again alleged 1933 Act and 1934 Act violations. The Court dismissed the 1933 Act claims on standing grounds once again, and dismissed the 1934 Act claims on Rule 9(b) grounds with respect to some, but not all, of the defendants. In re WRT Energy Sec. Litig., No. 96 Civ. 3610 (JFK), 96 Civ. 3611 (JFK), 1999 WL 178749, at *1 (S.D.N.Y. Mar. 31, 1999). This time, the Court denied leave to replead the dismissed claims. Id. at *15.

  On June 18, 2002, Plaintiffs dismissed their 1934 Act claims against the remaining defendants. Plaintiffs then appealed the Section 11 standing dismissals to the Second Circuit. While the appeal was pending, the Circuit held in DeMaria v. Anderson, 318 F.3d 170 (2d Cir. 2003), that aftermarket purchasers who can trace their securities to an allegedly misleading registration statement have standing to bring claims under Section 11 of the 1933 Act. Id. at 178. Based on DeMaria, the Circuit vacated the standing dismissals and remanded the 1933 Act claims to this Court for consideration of Page 3 the merits. In re WRT Energy Sec. Litig., 75 Fed. Appx. 839, 2003 WL 22221341 (2d Cir. 2003). Plaintiffs asserted these claims, but no 1934 Act claims, in their Fourth Class Action Complaint, filed on February 23, 2004. The Individual and Underwriter Defendants now move to dismiss.*fn1

  FACTUAL BACKGROUND

  A. Introduction

  This action, which has outlasted a New York Yankees dynasty, was brought on behalf of a putative class of individuals who purchased securities of the now-insolvent WRT Energy Corporation ("WRT") from October 20, 1993 through October 27, 1995 (the "Class Period"). The latest allegations focus on two transactions: (1) a preferred stock offering that commenced on October 20, 1993, and (2) a senior notes offering that commenced on February 28, 1995. During the Class Period, McGuire was Chairman of the Board and Chief Executive Officer of WRT, Guy was a Director of WRT and its Executive Vice President, Hale was WRT's Chief Financial Officer, and Lam and Rash were Directors of WRT. Oppenheimer and Schroder were co-underwriters of the 1995 senior notes offering. Page 4

  The facts alleged in the Complaint, accepted as true for purposes of the instant motions, are as follows. WRT was an oil and gas producer which specialized in acquiring and revitalizing "mature" oil and gas fields located primarily in Southern Louisiana. (Compl. ¶ 2).*fn2 WRT claimed that it could exploit the natural resources in these fields, where previous owners had failed, through the use of unique technology used to revitalize non-productive oil and gas wells. (Id. ¶ 3).

  On October 20, 1993, WRT commenced a public offering of approximately 1.1 million shares of preferred stock at $25 per share, for which WRT received approximately $25 million in proceeds. (Id. ¶ 20). Defendants McGuire and Hale signed the registration statement for this offering. (Id.). On February 28, 1995, WRT commenced a senior notes offering of 100,000 Units at $1000 per Unit, yielding $100 million. (Id. ¶ 27).*fn3 All of the Individual Defendants signed the registration statement for this offering, and Oppenheimer and Schroder acted as co-underwriters. (Id.). Plaintiffs claim that the registration statements contained material misstatements and omissions of fact. Generally, Plaintiffs' claims of wrongdoing in the Registration Page 5 Statements fall into two categories: (1) the overstatement and/or exaggeration of the success WRT had in its revitalizing activities, a core aspect of WRT's business, and (2) the misrepresentation of the WRT's technological capacities. (See id. ¶¶ 21-22, 30-31).

  B. WRT's Revitalization Activities

  Plaintiffs claim that the Preferred Stock Offering Registration Statement ("PRS") incorrectly stated that WRT had "demonstrate[d] its ability to use its technology to find previously untapped reservoirs in shut-in or abandoned wells and return such wells to commercial production"; that WRT had finished workovers of four wells in its West Hackberry Field and that all of them were "commercially productive"; and that WRT had experienced success in 24 of 31 recompletions, 57 of 69 newly drilled wells and 15 of 21 repaired wells in West Cote Blanche Bay Field." (Id. ¶ 22).

  Plaintiffs allege that the Senior Notes Offering Registration Statement ("SRS") essentially repeated many of the incorrect statements in the PRS. For example, Plaintiffs point to statements that WRT employed a "technology-based approach to oil and gas development"; that "[a]pplication of the Company's technologies to its existing properties has resulted in substantial increases in overall production rates, oil and gas reserves and cash flow"; that WRT "had a 84% success rate in Page 6 identifying and developing commercial reservoirs in shut-in wells" since 1987; and that WRT experienced 14 of 16 successful revitalizations in East Hackberry Field. (Id. ¶ 30). Plaintiffs further allege that the SRS repeated the West Hackberry Field successes (detailed above) and described the West Cote Blanche Bay successes (also detailed above) as "a representative example" of how the Company could identify and exploit untapped production from shut-in or abandoned wells. (Id.).

  These glowing statements, according to Plaintiffs, failed to comport with unrevealed realities concerning WRT's successes. The Complaint alleges that "the majority of these wells were failures because they did not pay back the drilling and/or revitalization costs"; that "WRT's drilling and revitalization efforts were never successful"; and that "no more than 40% of WRT's wells were economic successes" during the Class Period. (Id. ¶ 36). Plaintiffs attempt to confirm these claims by reference to internal memoranda prepared by WRT's geological consultant, the Scotia Group ("Scotia"),*fn4 dated June 2, 1994, February 1995, and July 17, 1995 (see id. ¶¶ 37, 45), and WRT's reserve reports (see id. ¶¶ 38-40).

  Plaintiffs allege that the reserve reports paint a far dimmer picture of WRT's revitalizations than the registration statements. With respect to the 31 wells in West Cote Blanche Page 7 Bay Field, Plaintiffs allege that the actual number of "economic" successes was 13, not 24. (Id. ¶ 40). The Complaint gives examples of 18 so-called "successes" that were revitalized or reworked between September 1988 and November 1991. According to Plaintiffs, the data show that the wells did not recoup the day-to-day operational costs, let alone the capital costs of the revitalizations. (Id. ¶¶ 40-41). West Hackberry allegedly performed even more poorly: 3 of 17 successful workovers in 1993. (See id. ¶ 42). As for East Hackberry, the SRS stated that this field increased oil production by 100% since the purchase of one property in February 1994 and the commencement of a workover on a second property in June 1994. (Id. ¶ 43). Plaintiffs note, however, that the SRS did not disclose that "WRT spent approximately $5.1 million on the workovers through December 1994, an inordinately high figure, and these costs continued to escalate" and that "[t]he additional production realized from the workovers in this field were [sic] insufficient to cover these expenses and all of the workovers were colossal failures." (Id.).

  Plaintiffs further claim that WRT's drilling and revitalization efforts "were never successful." (Id. ¶ 44). In essence, Plaintiffs allege that several wells produced at low levels (if at all) or only for short times, despite the revitalizations and workovers, without paying back costs. These workovers or restorations, which were completed between July 1994 Page 8 and January 1995 (before the senior notes offering), involved wells in the West and East Hackberry Fields and Lac Blanc Field. (Id. ¶ 44(a)). Plaintiffs also allege failures after the senior notes offering in the West Hackberry and Bayou Penchant Fields. (Id. ¶ 44(b)).

  C. WRT's Technological Capabilities

  Three varieties of technology are at issue in this case: logging tools, a computerized database, and hydrocyclone fluid separation equipment. Plaintiffs allege that the PRS incorrectly stated that WRT was "the only independent oil and gas company" with the tools to "log cased wells" ("logging tools"), giving WRT operational, competitive and scheduling advantages; that WRT's proprietary computerized database made WRT "better able to evaluate and target suitable acquisitions"; and that the application of advanced hydrocyclone fluid separation equipment "significantly improved production rates in many of the wells to which they have been applied by [WRT]." (Id. ¶¶ 22-26). Plaintiffs say that the PRS gave only one example of a successful employment of the hydrocyclone process: Tigre Lagoon Delcambre #1 well, which the PRS said increased its daily production tenfold in the two years following its workover. (Id. ¶ 26).

  The Complaint further alleges that the SRS, like the PRS, misrepresents the advantages of WRT's logging tools, proprietary computerized database and hydrocyclone equipment. Page 9 (Id. ¶¶ 32-34). The allegations here are essentially the same as before. The only major addition is with respect to the hydrocyclone equipment. Plaintiffs allege that the SRS includes a statement that Lac Blanc Field had been plagued by excess saltwater concentrations, and the application of hydrocyclone equipment resulted in better than a 200% increase in gas production. (See id. ¶ 34).

  Plaintiffs claim that WRT's advanced proprietary technology was neither advanced nor advantageous. The Complaint refers to one Scotia report, which found that WRT had a "smoke and mirrors approach to technical work" and that WRT "was neither especially high-tech nor at this point in time, efficient." (Id. ¶ 45). Plaintiffs contend that it would have been more cost-efficient to hire a large oil service company with the most technologically advanced equipment, rather than own logging equipment that would become obsolete. (Id. ¶¶ 46-47). Plaintiffs also claim that WRT's proprietary computerized database contained only well logs and historical production, reworking and drilling records — all of which were in the public domain. (Id. ¶ 48). Finally, Plaintiffs allege that WRT's hydrocyclone technology was purchased from third parties and completely accessible to WRT's competitors. (Id. ¶ 49). Page 10

  D. WRT Collapses

  Plaintiffs claim that the matters incorrectly stated in the PRS and SRS adversely affected WRT's operations. (Id. ¶ 51). The preferred stock, which had closed at $28.25 on October 28, 1993, had fallen to $9.00 per share by October 26, 1995. The next day, October 27, 1995, WRT announced that it could no longer "support [its] 1995 capital requirements and fund existing debt service and dividends payable on preferred stock." (Id. ¶ 51). The preferred stock closed at $8.25 that day, and then dropped to $5.50 on October 30, 1995. The senior notes fared no better, falling from $98.50 on August 28, 1995, to $68.00 on October 27, 1995, and to $50.00 on November 24, 1995. (Id. ¶ 52).

  On November 14, 1995, WRT issued its quarterly report, which was signed by Hale. The report disclosed that "it is unlikely that [WRT] will have sufficient cash to meet the . . . interest payment on the Senior Notes," that WRT doubted if it could continue as a "going concern" if current conditions persisted, and that McGuire and Guy had resigned on November 10, 1995. (Id. ¶ 53). WRT filed a Chapter 11 petition for bankruptcy on February 14, 1996. (Id. ¶ 54). As a result of WRT's demise, Plaintiffs now hold "practically worthless" shares of WRT preferred stock and senior notes. (Id.). Page 11

  E. Plaintiffs' Claims

  Plaintiffs allege that Defendants failed to conduct a "reasonable investigation" and did not have "reasonable ground to believe . . . at the time such [materially incorrect] part[s] of the registration statement[s] became effective, that the statements therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading." (Id. ¶ 50) (quoting language from Section 11 of the 1933 Act, 15 U.S.C. § 77k(b)(3)(A)). Plaintiffs bring Section 11 claims against McGuire and Hale with respect to the PRS and against all of the defendants with respect to the SRS. Plaintiffs add a Section 15 claim for control person liability against the Individual Defendants.

  DISCUSSION

  A. Legal Standards

  1. Rule 12(b)(6)

  When presented with a Fed.R.Civ.P. 12(b)(6) motion, the Court's task is to assess the legal feasibility of the complaint rather than to weigh the evidence that might be offered in support thereof. See, e.g., Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980). Accordingly, the Court accepts Plaintiffs' factual allegations as true and draws all reasonable inferences in Plaintiffs' favor. See Chambers v. Time Warner, Page 12 Inc., 282 F.3d 147, 152 (2d Cir. 2002). Therefore, Defendants' motions should be granted only if it appears beyond doubt that Plaintiffs can prove no set of facts in support of their claims which would entitle them to relief. See Sweet v. Sheahan, 235 F.3d 80, 83 (2d Cir. 2000).

  The Court generally does not consider documents outside the pleadings on a motion to dismiss, but an exception applies for any documents attached to the pleadings as exhibits, any documents or statements incorporated into the complaint by reference and any "integral" documents upon which the complaint relies. Int'l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995). For example, a prospectus is "integral" to a complaint alleging a Section 11 claim and should be considered in its entirety regardless of how infrequently the plaintiff references it in the complaint. See I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir. 1991).*fn5 Page 13

  2. Section 11 of the 1933 Act

  Congress enacted Section 11 of the 1933 Act "to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry." See SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186, 84 S. Ct. 275, 11 L. Ed. 2d 237 (1963). The statute provides in relevant part:

In case any part of the registration statement, when such part became effective, 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, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, either at law or in equity, in any court of competent jurisdiction, sue —
(1) every person who signed the registration statement . . .
(5) every underwriter with respect to such security.
15 U.S.C. § 77k(a). The goal behind full disclosure is to place purchasers in parity with vendors to the most practicable extent. Feit v. Leasco Data Processing Equip. Corp., 332 F. Supp. 544, 563 (E.D.N.Y. 1971). The potential for civil liability exists not so much to compensate defrauded purchasers as to promote enforcement of the law and deter negligence by penalizing those who fail in their duties. Globus v. Law Research Serv., Inc., 418 F.2d 1276, 1288 (2d Cir. 1969). Page 14

  B. Rule 8 versus Rule 9(b)

  The first issue is whether Federal Rule of Civil Procedure 8(a) or 9(b) governs Plaintiffs' allegations. Rule 8(a) requires only a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a). Rule 9(b) requires that "the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). The Underwriter Defendants contend that the heightened Rule 9(b) standard applies because the complaint contains wording "classically associated with fraud." (Und. Def. Mem. at 17). Plaintiffs, of course, seek application of Rule 8(a)'s less stringent pleading standard.

  The phrases "materially incorrect," "untrue statements" and "did not have reasonable ground to believe" — cited by the Underwriter Defendants as indications of fraud pleading — merely allude to language in Section 11 of the 1933 Act. See 15 U.S.C. § 77k(a), (b) (3) ("untrue statement of material fact"; "reasonable ground to believe and did believe"). While it is true that Rule 9(b) applies to a Section 11 claim "when the claim sounds in fraud," Rombach v. Chang, 355 F.3d 164, 167 (2d Cir. 2004), fraud is neither an element nor a prerequisite to a Section 11 claim. Id. at 171. Plaintiffs worded their Complaint carefully to avoid any allegations sounding in fraud. At most, the allegations sound in negligence. In any event, Plaintiffs Page 15 need allege only a material misstatement or omission in the registration statement to make a prima facie Section 11 claim. Herman & McLean v. Huddleston, 459 U.S. 375, 382, 103 S. Ct. 683, 74 L. Ed. 2d 548 (1983). "Neither knowledge nor reason to know is an element in a plaintiff's prima facie case." Degulis v. LXR Biotechnology, Inc., No. 95 Civ. 4204 (RWS), 1997 WL 20832 at *3 (S.D.N.Y. Jan. 21, 1997). Rule 8(a) applies.

  C. The Registration Statement's Expertised Sections

  The Underwriter Defendants contend that Plaintiffs premise their Section 11 claims almost entirely on reports prepared by Scotia and financial statements audited or reviewed by KPMG, which were incorporated into the Registration Statement. (Und. Def. Mem. at 13). The Underwriters argue that Plaintiffs, in their briefs to the Second Circuit, disclaimed any averments of fraud and scienter with respect to their Section 11 claims. Therefore, so the argument goes, Plaintiffs cannot claim that the Underwriter Defendants had no reasonable ground to believe and did not believe the expertised disclosures. (Id.).

  This argument fails. Section 11 provides an affirmative defense that pertains to the expertised portions of a registration statement. Section 11 is clear, however, that the underwriter has the burden of proving that it "had no reasonable ground to believe and did not believe" that the expertised portions contained material misstatements or omissions. See Page 16 15 U.S.C. § 77k(b); Griffin v. PaineWebber Inc., 84 F. Supp. 2d 508, 512-13 (S.D.N.Y. 2000). Although the Court may dismiss a claim pursuant to a Rule 12(b)(6) motion when an affirmative defense appears on the face of the complaint, Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 74 (2d Cir. 1998), the Underwriters lay a trap for Plaintiffs on the basis of (supposedly disclaimed) fraud allegations which are absent from the face of the Complaint.

  The Underwriters' reliance on Plaintiffs' supposed disclaimer of fraud and scienter in their Second Circuit brief is unavailing. The Court will not consider materials outside the pleadings on a motion to dismiss unless they are attached to the pleadings as exhibits, incorporated into the complaint or integral to the complaint. The Circuit brief appears as an exhibit to the Underwriters' motion papers. (Steinberg Aff., Exh. D). The Underwriters cite Purgess v. Sharrock, 33 F.3d 134, 144 (2d Cir. 1994), for the proposition that statements in briefs are binding judicial admissions. Purguess involved the admission during trial of a statement made by counsel in a memorandum of law supporting a prior motion to dismiss. Id. at 143. Purgess had nothing to do with the consideration of materials outside the pleadings on a Rule 12(b)(6) motion to dismiss. Page 17

  D. Falseness of the PRS and SRS on Their Effective Dates

  The Underwriter and Individual Defendants argue that the Complaint makes allegations based on production results, cost records, pricing data and purported "failures post-dating the Senior Notes Offering." (Und. Def. Mem. at 14; Ind. Def. Mem. at 9-11). The Defendants contend that they cannot be held liable for failing to make accurate projections concerning post-offering drilling results. Furthermore, the Underwriters use side-by-side comparisons to highlight many "inconsistencies" between the Complaint and the SRS. (Und. Def. Mem. at 15-17, Appx.). These arguments also fail.

  First, the Complaint contains several allegations that at least lead to an inference that failures occurred before the effective dates of both the PRS and the SRS. For example, Plaintiffs allege that the registration statements overstated WRT's successes with respect to well revitalizations and reworkings in the West Cote Blanche Bay, West Hackberry and East Hackberry Fields. The Complaint specifically states that these wells were reworked or revitalized between 1988 and 1991, well before the preferred stock offering in 1993, and that "WRT's drilling and revitalization efforts were never successful." (Id. ¶ 36, 40-41). While certainly there is some dispute over exactly when the wells began to fail (before or after the offerings), this dispute must be left to the factfinder. Page 18

  With respect to the side-by-side comparisons of the Complaint and SRS, clearly there are some inconsistencies. One example suffices to illustrate for all. According to the Underwriter Defendants, Plaintiffs allege that "`WRT's production records during the Class Period showed that [hydrocyclone] technology . . . had not produced economic results' in the Tigre Lagoon Field (Delcambre No. 1 well)." (Und. Def. Mem. at 16) (citing to Compl. ¶ 49). The Underwriter Defendants compare this allegation to the SRS, which states that "[i]n March 1994, [WRT] sold an interest in its Delcambre No. 1 well located in the Tigre Lagoon Field and recorded a $465,000 gain." (Steinberg Aff., Exh. C at 34). In summary, Plaintiffs say that hydrocyclone technology did not produce economic results in the Tigre Lagoon Field; on the other hand, WRT sold an interest in Declambre No. 1 for a $465,000 gain.

  The Court has examined closely the side-by-side comparisons. The Underwriters' rendering of Paragraph 49 of the Complaint is somewhat imprecise. The paragraph actually alleges that the hydrocyclone technology was accessible to WRT's competitors, had only been tried on 5 wells out of 100 (including Tigre Lagoon) and "had not produced economic results anywhere." (Compl. ¶ 49) (emphasis added). Furthermore, the focus in Paragraph 49 is on misstatements concerning technology, not economic gain. By contrast, the focus of the excerpted portion Page 19 of the SRS is "Gain on Sale of Oil and Gas Properties." (Steinberg Aff. Exh. C at 34). Ultimately, with respect to the revitalization allegations, the Underwriters fire several shots across the Complaint's bow. They do not score a direct hit.

  This is not to say that the Underwriters do not have the potential to inflict damage. There is no question that the comparisons indicate that Plaintiffs may have their work cut out for them in several areas. Nevertheless, the Court is mindful that materiality is a "fact-intensive inquiry," In re Worldcom, Inc. Sec. Litig., 346 F. Supp. 2d 628, 658 (S.D.N.Y. 2004), and that the focus is not "on whether particular statements, taken separately, were literally true, but whether defendants' representations, taken together and in context, would have mis[led] a reasonable investor." DeMaria v. Anderson, 318 F.3d 170, 180 (2d Cir. 2003) (internal quotes omitted). Sometimes, as in the case of some of the technologies (discussed below), excerpts from the PRS and SRS unquestionably refute the allegations in the Complaint. The examples pertaining to the revitalizations do not rise to the same level of obviousness.

  E. Risk Disclosures in the SRS

  The Underwriter Defendants next contend that WRT's SRS not only bespeaks caution, but "shout[s] it from the rooftops." (Und. Def. Mem. at 18) (quoting Halperin v. eBankerUSA.com, Inc., 295 F.3d 352, 360 (2d Cir. 2002)). They claim that the SRS is Page 20 "saturated" with detailed risk factors specifically cautioning investors about the "uncertainty of reserve estimates." For example, "[t]he oil and gas reserve information set forth [in the SRS] represents only estimates. Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and gas that cannot be measured in an exact manner." (Id.) (quoting Steinberg Aff., Exh. C at 46). The Individual Defendants also point to several statements in the PRS that make clear that investment in the oil and gas industry is a risky business. (Ind. Def. Mem. at 6-9).

  The Court is not convinced. These excerpts from the WRT materials are generalized warnings concerning future risks. The gravamen of Plaintiffs' claim is that the Registration Statements materially misstated and omitted facts relating to current conditions (the success of WRT's revitalization efforts and WRT's technological capacities). In a recent decision, the Second Circuit held that application of the "bespeaks caution" doctrine is limited only to forward-looking representations, not misrepresentations of present or historical facts. P. Stolz Family P'ship L.P. v. Daum, 355 F.3d 92, 96-97 (2d Cir. 2004). Application of the "bespeaks caution" doctrine, whether from the rooftops or elsewhere, avails the Defendants naught.

  The only statement offered by the Defendants that pertains to historical fact is an excerpt from the PRS which Page 21 states that "production volumes have varied significantly since November 1992." (Ind. Def. Mem. at 9). The Court finds that this language is too general to strike directly at the heart of Plaintiffs' allegations concerning the revitalizations, as required by the bespeaks caution doctrine. See Hunt v. Alliance N. Amer. Gov't Income Trust, Inc., 159 F.3d 723, 729 (2d Cir. 1998) ("The cautionary language . . . must relate directly to that by which plaintiffs claim to have been misled.").

  F. WRT's Technological Capabilities

  Both the Underwriter Defendants and the Individual Defendants attack Plaintiffs allegations concerning WRT's technology on several fronts. As stated previously, the three varieties of technology are WRT's logging tools, computerized database and hydrocyclone fluid separation equipment. Plaintiffs allege misstatements with respect to all three.

  1. Ownership of Logging Tools

  First, the Underwriter Defendants argue that Plaintiffs cannot seem to decide whether WRT's logging tools were "proprietary" or not. Sometimes, Plaintiffs allege that WRT's Registration Statements falsely stated that allege that WRT had "advanced" "proprietary" technology. (Und. Def. Mem. at 19; Compl. ¶ 45). Other times, Plaintiffs concede WRT's "ownership" of well-logging tools. (Compl. ¶ 46). Even if these statements Page 22 do contradict each other, as the Underwriters contend, Rule 8(e)(2) permits the pleading of alternative statements.

  The Individual Defendants launch a more damaging salvo than their Underwriter colleagues. They highlight Plaintiffs' contention that the PRS mischaracterizes WRT as:

"the only independent oil and gas company" with the tools to "log cased wells," allowing it to operate its logging equipment at a fraction of the rates charged by the large oil field service companies who provided similar tools to WRT's competitors [citing SRS]; to realize scheduling advantages since its management, rather than a third-party field service company, directly controlled the tools; and to use its in-house expertise in reading the well logs.
(Ind. Def. Mem. at 13; Compl ¶ 25). Plaintiffs allege that the SRS makes similar statements. (Compl. ¶ 32). According to the Complaint, these statements were false because:
WRT's ownership of its own well-logging tools conferred no advantages to [WRT], economic or otherwise. Indeed, even the largest oil and gas producers who could far better afford to invest in technology than WRT used the large oil service companies like Schlumberger and Halliburton because they were the most technologically advanced and because it was more cost efficient for an oil and gas producer to hire them than to own its own technology.
  Thus, the same well logging equipment was available to WRT's competitors through the large well-service companies and, had ownership conferred any advantage, WRT's competitors could have readily purchased the same equipment. In fact, ownership of the tools was a detriment, not an advantage. Technological advances in well logging equipment forced owners, like WRT, either to buy new models or to use obsolete equipment. Page 23 Competitors who used the large oil field service companies did not face this constraint.

 (Compl. ¶ 46-47). The Court fails to see how the allegation that WRT's competitors "could have readily purchased the same equipment" leads to an inference that WRT made false statements regarding the logging tools and the advantages of such tools (in-house expertise, scheduling flexibility, and cost savings).

  Furthermore, it appears from the PRS that WRT disclosed that other companies had access to logging technology. Plaintiffs allege that WRT represented itself as "the only independent oil and gas company" with the tools to "log case wells." (Compl. ¶ 25). What the PRS really says is:

Although radioactive logging tools are employed by a few large oil field service companies, the Company believes it is the only independent oil and gas company with the in-house capability to log case wells. In addition, the Company believes it can operate its logging equipment at a fraction of the rates charged by oil field service companies. The Company believes that its experience in the Gulf Coast and its database give it an advantage over other companies competing for similar properties.
. . . .
While similar radioactive logging technology is used by Schlumberger, Dresser-Atlas, Halliburton Logging Services and Computalog, these firms concentrate solely on the oil and field service business, rather than the ownership and operation of oil and gas properties.
(Eckas Aff., Exh. 2 at 3, 33). While the Court is not going to blindly excuse alleged misstatements because of the presence of Page 24 the stock phrase "the Company believes," these excerpts from the PRS clearly answer Plaintiffs' allegations that Schlumberger and Halliburton offered the same services and that the technology was available to WRT's competitors.

  2. WRT's Computerized Database

  The Underwriter Defendants next attempt to debunk Plaintiffs' allegation that WRT's computerized database contained nothing not in the public domain and readily available to WRT's competitors. (Und. Def. Mem. at 20; Compl. ¶ 48). The Underwriters point to a statement in the SRS disclosing that WRT's database incorporated "information on approximately 100,000 wells in 1,000 of the largest fields along the Louisiana and Texas Gulf Coast." (Steinberg Aff., Exh. C at 4-5). "Simple common sense," the Underwriter Defendants suggest, "suggests that information on [these fields], which were neither owned nor operated by WRT, would be accessible to the public." (Und. Def. Mem. at 20). The Individual Defendants note further that the PRS represents only that the computerized database was more efficient than the former paper file system. (Ind. Def. Mem. at 15).

  The Defendants win this round as well. Plaintiffs allege that the PRS misrepresented that the database rendered WRT "better able to evaluate and target suitable acquisitions." (Compl. ¶ 25). In the same paragraph, however, Plaintiffs claim that the information on the database "was originally compiled by Page 25 hand from publicly available information and entered into a computerized database." (Id.). Surely, as the Individual Defendants contend, a computerized version of the information would be "better" suited than a hand-compilation to whatever use WRT saw fit for the information.

  Plaintiffs also allege that the SRS misrepresented that the database "was used to rank the fields as acquisition candidates . . . and integrated with the Company's well log interpretation software the evaluation of old [well] logs." (Id. ¶ 33). Plaintiffs claim that this representation was "materially incorrect . . . as more fully set forth below in ¶¶ 45, 48." (Id.). Paragraph 45 merely repeats the allegation that WRT's technology was neither advanced nor proprietary, and Paragraph 48 states that the database consisted exclusively of logs and records made by drillers and operators, all of which was in the public domain. (Id. ¶¶ 45, 48). These allegations concerning the public domain simply do not establish, by any stretch of the imagination, the falsity of representations in Paragraphs 25 and 33 of the Complaint — which have to do with the targeting of potential acquisitions and integration with log interpretation software. Page 26

  3. WRT's Hydrocyclone Fluid Separation Equipment

  As for the hydrocyclone technology, the Underwriter and Individual Defendants claim that the Complaint takes liberties with the language in the SRS. According to the Complaint:

The [PRS] represented that WRT's fluid separation technology allowed it both to reopen wells where further production would not otherwise be economically viable and to increase production at other wells still in operation but not functioning optimally. The Registration Statement further represented that the application of this technology and its "know-how" had "significantly improved production rates in many of the wells to which they have been applied by the Company." [citation]. The Registration Statement identified only one well where the hydrocyclone process had been employed, Tigre Lagoon Delcambre #1 well. [citation]. According to the Registration Statement, the well had been shut-in for excessive water production but reworked using a hydrocyclone machine and gas production increased from the "marginal" rate of 300 Mcf per day to an average of over 3,000 Mcf per day in the two years following the workover.
(Compl. ¶ 26). The SRS apparently made similar representations, including a statement that "Lac Blanc Field had been plagued by excess saltwater concentrations but that the application of hydrocyclone equipment had resulted in a gas production increase from 5 Mmcf to an average of 16 Mmcf." (Id. ¶ 34). Plaintiffs explain the misrepresentations as follows:

  WRT's hydrocyclone technology had not even been developed by WRT but was purchased from third parties. Thus, WRT's competitors had access to the same hydrocyclone technology and used it at the same time and in the same ways that WRT tried to do. Furthermore, WRT's production records during the Class Period showed that this technology had only been tried on five wells in the Lac Blanc and Page 27 Tigre Lagoon Fields out of a total of over 100 wells that the Company worked on and had not produced economic results anywhere.

 (Id. ¶ 49). In essence, Plaintiffs make two allegations: (1) WRT's competitors had the hydrocyclone technology, thereby negating any supposed advantage to WRT, and (2) WRT only tried the technology on five wells.

  The PRS refutes Plaintiffs' first contention. According to the PRS, "The type of hydrocyclones used by the Company are presently sold by Conoco Specialty Products, although hydrocyclones of different design are manufactured and sold by others." (Eckard Aff., Exh. 2 at 34). This statement makes clear that WRT's competitors had access to the technology. The allegations concerning the success of hydrocyclone technology are a closer call. Plaintiffs claim the technology was only used on five wells, with no success. The PRS states: "The Company has developed the know-how necessary to coordinate well designs, recompletion methods and production technologies to optimize the productivity of its hydrocyclone operations. These high volume fluid handling techniques have significantly improved production rates in many of the wells to which they have been applied by the Company." (Eckerd Aff., Exh. 2 at 34). "[K]now-how" and "many of the wells" may imply that the hydrocyclone equipment was used on more than five wells. Without in any way passing judgment on this issue, the Court cannot say as a matter of law that this Page 28 statement "[is] obviously so unimportant to a reasonable investor that reasonable investors that reasonable minds could not differ on the question of [its] importance." Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 180 (2d Cir. 2001). Defendants might say, in return, that the PRS and SRS disclosed the wells on which hydrocyclone technology had been attempted (Tigre Lagoon Delcambre and Lac Blanc Field). Maybe so, but it is a question of fact. Plaintiffs' allegations concerning the hydrocyclone technology may go forward.

  In summary, the Court finds that Plaintiffs have not adequately plead misstatements or omissions with respect to WRT's logging tools or computerized database. To the extent Plaintiffs' Section 11 claims are premised on these allegations, Defendants' motions to dismiss are granted. Although not a gold-medal performance, Plaintiffs clear the bar with respect to their allegations concerning the hydrocyclone equipment.

  G. Recovery for Damages Under Section 11(e)

  The Defendants contend that they cannot be charged with the decline in price of the preferred stock and senior notes prior to WRT's adverse announcement on October 27, 1995. (Und. Def. Mem. at 23; Ind. Def. Mem. at 19; Ind. Def. Rep. Mem. at 13). Under Section 11(e) of the 1933 Act, "if the defendant proves that any portion or all of such damages represents other than the depreciation in value of such security resulting from Page 29 [the] part of the registration statement . . . [containing the material misstatement or omission], such portion of or all such damages shall not be recoverable." 15 U.S.C. § 77k(e). This is called the affirmative defense of "negative causation." McMahan & Co. v. Wherehouse Entm't Inc., 65 F.3d 1044, 1048 (2d Cir. 1995). As explained above, a defendant is free to raise an affirmative defense in a Rule 12(b)(6) motion if the defense appears on the face of the Complaint.

  A decline in the price of the securities prior to disclosure of the material misstatement or omission may not be charged to the defendants. See, e.g., Akerman v. Oryx Communications, Inc., 810 F.2d 336, 342 (2d Cir. 1987); In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 289 F. Supp. 2d 429, 437 (S.D.N.Y. 2003). The Complaint alleges:

The matters incorrectly stated in the Registration Statement as set forth above continued to adversely affect the operations of the Company. Finally, on October 27, 1995, they led to WRT's announcement that it would be unable to "support the Company's 1995 capital requirements and fund existing debt service and dividends payable on preferred stock." (Emphasis added).
The market reacted swiftly to these adverse revelations [on October 27, 1995]. WRT Preferred Stock, which had closed at $28.25 on October 28, 1993, fell from a closing price of $9.00 per share on October 26, 1995 to $8.25 on October 27 [the date of the announcement] and $5.50 on October 30. Likewise, the Senior Notes fell in price from $98.50 on August 28, 1995 (two months before the end of the Class Period) to $68.00 on October 27 and $50.00 on November 24, 1995.
Page 30

 (Compl. ¶ 51-52). It is clear on the face of the Complaint that the both preferred stock and senior notes were in free fall before the alleged disclosure of WRT's true financial condition on October 27, 1995. Plaintiffs' only response is that damages issues are highly factual and that "[t]he Complaint alleges that the facts underlying the Section 11 violations drove down the price of both the Preferred Stock and the Senior Notes both before and after WRT's October 27, 1995 disclosure of negative news that ends the Class Period." (Pl. Mem. at 26).

  The Court agrees that damages are a highly factual matter, but the 1933 Act and the precedent in this Circuit are clear: damages predating the disclosure of the misstatements or omissions are not chargeable to the Defendants. The earliest disclosure that the Court can see on the face of the Complaint is WRT's October 27, 1995 announcement. Under Section 11(e), the Defendants are not liable for any declines in the value of the preferred stock and senior notes that occurred prior to the WRT announcement on October 27, 1995.

  The Underwriter Defendants additionally argue that some of the Plaintiffs paid a higher price than the offering price for their securities, and that Section 11(e) prevents these Plaintiffs from recovering damages above the offering price. (Und. Def. Mem. at 23). The Underwriter Defendants correctly state the law, but their argument is moot in light of the Court's Page 31 finding that Plaintiffs cannot recover for the decline in value of their securities prior to October 27, 1995.

  H. Section 15 Control Person Liability

  Plaintiffs assert claims for control person liability against all of the Individual Defendants based on Section 15 of the 1933 Act. Section 15 states in relevant part: "Every person who . . . controls any person liable under sections 77k or 771 of this title, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable. . . ." 15 U.S.C. § 77o (emphasis added). To establish a prima facie case under Section 15, Plaintiffs must establish (1) a violation of Section 11 (called a "primary violation") by the controlled person and (2) control over the primary violator[s] by the defendant. SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996). The term "control" is defined as "the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise." Id. at 1472-73 (quoting 17 C.F.R. § 240.12b-2).

  The Individual Defendants move to dismiss these claims on two grounds. First, they make the boilerplate argument that Plaintiffs failed to state a claim for a primary violation under Section 11. The Court has not dismissed the Section 11 claims in their entirety, so this argument fails. Second, the Individual Page 32 Defendants claim that Plaintiffs fail to allege "actual control" by the Individual Defendants over primary violators with respect to the transactions at issue. (Ind. Def. Mem. at 16-17, Ind. Def. Rep. Mem. at 11-12). When pressed at oral argument concerning the propriety of dismissing claims against CEO McGuire and CFO Hale, who presumably had intimate control over WRT's day-to-day operations and transactions such as these, counsel for the Individual Defendants demurred and chose to focus his answer on directors Lam and Rash.

  The Individual Defendants missed the boat. Plaintiffs' argument is that they have "sufficiently alleged that each of the Individual Defendants controlled WRT." (Pl. Mem. at 33) (giving several examples from the Complaint of the alleged control). Control of WRT is irrelevant. WRT is not a defendant in this Complaint because of its insolvency; therefore, WRT cannot be a primary violator under Section 15. The only potential primary violators here are the Underwriter Defendants and the Individual Defendants themselves. Plaintiffs do not allege that the Individual Defendants controlled the Underwriter Defendants, or that any particular Individual Defendant (such as the C.E.O.) controlled any of the other Individual Defendants. See In re Initial Pub. Offering Sec. Litig., No. 21 MC 92, 01 Civ. 3020 (SAS), 2004 WL 2320364 at *16 (S.D.N.Y. Oct. 15, 2004) (dismissing Section 15 claims as duplicative of Section 11 claims Page 33 in similar situation); Griffin v. PaineWebber Inc., 84 F. Supp. 2d 508, 515-16 (S.D.N.Y. 2000) (similar analysis). Plaintiffs' Section 15 claim against the Individual Defendants is dismissed.

  I. Leave to Replead

  To the extent that the Court has granted the instant motions, Plaintiffs are not given leave to replead their Complaint. This case is over nine years old. Plaintiffs have already had three opportunities to plead claims their against the Underwriter Defendants and Individual Defendants. Another amendment would be futile and would cause undue delay. See Leonelli v. Pennwalt Corp., 887 F.2d 1195, 1196 (2d Cir. 1989).

  CONCLUSION

  For the foregoing reasons, Defendants' motions to dismiss Plaintiffs' Section 11 claims are granted insofar as these claims rely on alleged material misstatements or omissions concerning WRT's logging tools and WRT's computerized database. The Court finds that Defendants have established the affirmative defense of negative causation on the face of the Complaint. Plaintiffs' damages therefore are limited solely to the decline in value of their securities after the WRT announcement on October 27, 1995. Plaintiffs' Section 15 claim for control person liability is dismissed in its entirety. In all other respects, Defendants' motions are denied. Plaintiffs are denied leave to replead the dismissals herein. Page 34

  The parties are referred to Magistrate Judge Francis for continued discovery in accordance with his Order dated January 24, 2005. A status conference is scheduled for June 6, 2005 at 9:45 a.m. in Courtroom 20C of the United States Courthouse, 500 Pearl Street, New York, New York.

  SO ORDERED.


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