The opinion of the court was delivered by: JOHN KEENAN, Senior District Judge
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.
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,
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
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
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
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.
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
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
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
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."
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
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.
(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).
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 ...