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.
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).
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.).
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
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,
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.
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
(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).
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
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
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.
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.
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
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
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
"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
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
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
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
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
(Eckas Aff., Exh. 2 at 3, 33). While the Court is not going to
blindly excuse alleged misstatements because of the presence of
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
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
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
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
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
[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
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.
(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
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
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
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).
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
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.