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In Re Tronox

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK


January 5, 2011

IN RE TRONOX, INC. SECURITIES

The opinion of the court was delivered by: A. Scheindlin, U.S.D.J.:

X SHIRA

OPINION AND ORDER LITIGATION

I. INTRODUCTION

This action arises from alleged false and misleading statements made by Tronox, Inc. ("Tronox") during and following its initial public offering in 2005 (the "IPO" or "Tronox IPO"). On June 28, 2010, I issued an Opinion and Order ("Tronox I")*fn1 ruling on defendants' motions to dismiss various claims asserted in plaintiffs' Consolidated Amended Complaint ("CAC") and granting plaintiffs leave to replead certain claims. On July 30, 2010, plaintiffs filed their First Amended Consolidated Complaint ("FAC" or "Amended Complaint"). Count IV of that complaint alleges that Kerr-McGee Corporation ("KMG"); Anadarko Petroleum Corporation ("Anadarko") (as successor-in-interest to KMG and pursuant to respondeat superior); and Luke Corbett, Robert Wohleber (through the August 10, 2006 "Merger"), and Gregory Pilcher (through August 10, 2006) (collectively, the "KMG Officers") are liable as controlling persons both of Tronox and of the Tronox Officers.*fn2 KMG and Wohleber now move to dismiss Count IV for the period after the March 31, 2006 "Spin-Off"*fn3 ; Corbett and Pilcher move to dismiss Count IV in full; and Anadarko moves to dismiss Count IV and to strike those allegations pertaining to respondeat superior liability. For the following reasons, KMG's motion to dismiss is denied; Anadarko's motion to dismiss is denied in part and granted in part; and the KMG Officers' motion to dismiss is denied in part and granted in part.

II. APPLICABLE LAW

A. Control Person Liability Under Section 20(a) of the Exchange Act

"To establish a prima facie case of control person liability, a plaintiff must show (1) a primary violation by the controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person's fraud."*fn4

"[C]ontrol over a primary violator may be established by showing that [the controller] possessed '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.'"*fn5 "Actual control is essential to control person liability."*fn6 Moreover, "the Section 20(a) defendant must . . . have actual control over the transaction in question."*fn7 However, "[f]or purposes of Section 20(a) liability, actual control requires only the ability to direct the actions of the controlled person, and not the active exercise thereof."*fn8 "Allegations of influence are not the same as the power to direct the management and policies of the primary violator."*fn9 "Status of defendants as directors, 'standing alone, is insufficient to establish their control.'"*fn10

"Allegations of control are not averments of fraud and therefore need not be pleaded with particularity."*fn11 Thus, "'[a]t the pleading stage, the extent to which the control must be alleged will be governed by Rule 8's pleading standard.'"*fn12 "In the Second Circuit, 'the control person provisions are broadly construed as they were meant to expand the scope of liability under the securities laws.'"*fn13 "Whether a person is a 'controlling person' is a fact-intensive inquiry, and generally should not be resolved on a motion to dismiss."*fn14

B. Respondeat Superior Liability*fn15

"Respondeat superior imposes liability upon a principal for the torts of [its] agent committed within the scope of their agency relationship."*fn16 A principal-agent relationship "is created when [1] one party consents to have another act on its behalf, [2] with the principal controlling and directing the acts of the agent."*fn17 "Under the rubric of agency liability, there are two main theories -- actual authority and apparent authority. . . . Actual authority is that authority which a principal expressly or implicitly grants to an agent. . . . Apparent authority is that authority which, though not actually granted, the principal knowingly or negligently permits an agent to exercise, or which he holds him out as possessing."*fn18

"Under the agency theory, the issue of liability rests on the amount of control the parent corporation exercises over the actions of the subsidiary. . . . The parent corporation will be held liable for the activities of the subsidiary only if the parent dominates those activities."*fn19 "[W]hile one corporation whose shares are owned by a second corporation does not, by that fact alone, become the agent of the second company, a corporation -- completely independent of a second corporation -- may assume the role of the second corporation's agent in the course of one or more specific transactions."*fn20 "Circumstantial evidence of a principal-agent relationship includes the exclusive dedication of a subsidiary to assisting the parent company,payment of the subsidiary's expenses by the parent company, and requests for approval of the parent company for important decisions by the subsidiary."*fn21 "The level of control necessary to form a principal-agent relationship between a parent company and subsidiary defies resolution by mechanical formula[e], for the inquiry is inherently fact-specific."*fn22

C. Successor-in-Interest Liability

"[A] corporation acquiring the assets of another does not succeed to the liabilities of the successor corporation except where (1) the successor expressly or impliedly assumed the liability; (2) there was a de facto merger of the successor and predecessor; (3) the successor was a mere continuation of the predecessor; or (4) the transaction was fraudulent."*fn23 The fraud exception applies only where "the transaction is fraudulent and intended to provide an escape from liability."*fn24

Federal Rule of Civil Procedure 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity."*fn25

III. DISCUSSION

A. KMG: Control Person Liability After March 31, 2006

In Tronox I, I dismissed plaintiffs' claim that "KMG (and, by extension, KMG's officers) retained control of Tronox after March 31, 2006."*fn26

Plaintiffs had argued that, despite the fact that Tronox became an independent company on April 1, 2006, "KMG retained control after March 31, 2006 by virtue of the Master Separation Agreement ["MSA"]."*fn27 This argument, I found, "fail[ed] as a result of plaintiffs' own allegations."*fn28 In particular, plaintiffs had alleged that a condition in the MSA -- under which KMG was only responsible for partially reimbursing Tronox for environmental costs after Tronox had already "paid above the amount reserved for specified sites"*fn29 -- rendered the indemnification illusory because "the Chemical Business [did] not have sufficient cash flow to spend the reserved amounts and thus qualify for indemnification."*fn30 Reasoning that "it is not plausible to think that Tronox was controlled by an indemnification it could not receive," I held that "this condition in the [MSA] cannot form the basis for plaintiffs' allegation of control."*fn31 However, I granted plaintiffs leave to replead their control claims based on misstatements made after Tronox's Spin-Off, "to the extent they are able to allege facts, other than the existence of the [MSA], that create a plausible inference that KMG controlled Tronox after March 31, 2006."*fn32

Based on "newly discovered information gleaned from Tronox's bankruptcy case that Tronox had received some reimbursement [from KMG] pursuant to the MSA,"*fn33 plaintiffs have removed from their complaint the allegation that indemnification under the MSA was "illusory." Therefore, the grounds on which I previously dismissed plaintiffs' control claims after March 31, 2006, no longer support their dismissal. I now find that the FAC's more fulsome allegations, based on several additional provisions of the MSA and supporting confidential witness ("CW") information,*fn34 adequately plead that KMG had "actual control over the transaction in question"*fn35 -- namely, Tronox's failure to record reserves for environmental remediation costs and tort claim liabilities that were both probable and reasonably estimable in violation of Generally Accepted Accounting Principles ("GAAP") after March 31, 2006.*fn36

First, under the terms of the MSA, KMG had no reimbursement obligation for environmental liabilities without KMG's prior written consent to any material change made by Tronox which increased any reserve amount by $2.5 million or more, or if Tronox established any reserve for a site where none had been previously recorded.*fn37 "In other words, to the extent that KMG had itself understated the environmental remediation reserves for the sites it transferred to Tronox in connection with the Tronox IPO, KMG ensured that those reserves would continue to be [publicly] understated by Tronox."*fn38

Second, the MSA required Tronox to adopt and use KMG's flawed reserve methodologies for the same remediation sites that were transferred to Tronox*fn39 -- the same improper reserving methodologies that formed the basis for this Court's finding that plaintiffs' primary securities fraud claims against Tronox could proceed. According to plaintiffs, "one Tronox senior manager believed that he could not change the method by which Tronox would [determine] environmental reserves -- which was the practice used by [KMG] and approved by [Ernst &Young, LLP] -- or the company risked losing whatever indemnity it had."*fn40

Plaintiffs' theory that KMG controlled Tronox through the MSA is bolstered by the allegation that KMG "imposed" the MSA on Tronox and "unilaterally determined" its content -- including "a highly unusual provision" that required Tronox to indemnify KMG for any material misstatements in the Tronox IPO Registration Statement.*fn41

Third, no later than eight business days following the end of each quarter, but prior to the public announcement of Tronox's financial results in an SEC filing or press release, Tronox was required to provide KMG with reserve estimates and any changes in reserve estimates, for the purposes of obtaining KMG's comments and approval prior to filing.*fn42 The MSA also required Tronox to deliver to KMG -- no later than ten business days prior to filing a 10-Q and twelve business days prior to filing a 10-K -- drafts of any discussion or analysis of contingent obligations to pay environmental recovery costs (as defined in the MSA) in order to obtain KMG's comments and approval.*fn43 KMG "made extensive revisions" to drafts of certain "notification letters" provided by Tronox pertaining to environmental reserve issues, was "constantly concerned with limiting assumable liabilities," and "made changes to the drafts that were ultimately incorporated."*fn44 Tronox employees who interacted with KMG were "constantly frustrated with the numerous changes made to the drafts but were powerless to avoid them."*fn45

Fourth, KMG and Tronox were "in regular communication."*fn46 They conducted "Quarterly Meetings" to "discuss remediation activities with respect to Former Operations, reserve estimates and matters giving rise to changes in reserves."*fn47 These meetings were to be conducted prior to Tronox's delivering reserve estimates and any changes thereto to KMG.*fn48 According to plaintiffs, a Vice-President of Governmental Affairs for Tronox "recalled having numerous conversations while at Tronox with [KMG] and Anadarko personnel in 2006, 2007, and 2008 regarding [KMG's] and then Anadarko's continuous attempts to influence the reserving process."*fn49

These allegations support the plausible inference that KMG "controlled the dissemination of the statements in the [SEC filings] that plaintiff[s] allege[] were materially false or misleading."*fn50 For example, it is plausible that through the Quarterly Meetings, KMG ensured that Tronox was responding as intended to the MSA's strong incentives to understate reserves,*fn51 and that it had the power not only to "influence" Tronox, but to "direct [its] management and policies."*fn52 Defendants argue that any interaction between KMG and Tronox pursuant to the MSA related solely to whether Tronox would receive any reimbursement from KMG, and reflected no involvement in the amount of reserves Tronox would publicly report.*fn53 Discovery may prove them right, but plaintiffs' allegations now support the plausible inference that such interactions facilitated and enabled KMG's control of Tronox's reserve reporting. As plaintiffs explain, the reimbursement provisions of the MSA "directly implicate reserves, regardless of whether they also relate to reimbursement calculations."*fn54 The fact that the MSA did not "give KMG the right to determine what the reserve estimates would be"*fn55 does not undermine plaintiffs' argument that the MSA was written and implemented in such a way that KMG had the power to effectively control Tronox's reserve estimates without explicitly doing so. That section 2.5(i) of the MSA "self-servingly recites that KMG's role in receiving notice, monitoring, overseeing, and providing consent, relate to whether KMG is obligated to provide reimbursement"*fn56 is entirely consistent with the "gravaman" of plaintiffs' complaint: "that KMG and others engaged in a deliberate fraud whereby KMG ridded itself of the Legacy Liabilities by transferring them to Tronox and in turn controlled Tronox's management and reporting of these obligations through the MSA and otherwise."*fn57

B. Anadarko

1. Control Person Liability After March 31, 2006

Anadarko argues that "Plaintiffs' Section 20(a) claim against Anadarko runs afoul of the undisputed fact that Anadarko is not even a party to the MSA, the document Plaintiffs contend provided KMG with the ability to exercise control over Tronox after the Spin-Off."*fn58 However, plaintiffs have alleged that not only KMG, but also Anadarko, were "deeply involved in the process of determining Tronox's remediation obligations and reserves, the core of the fraud alleged in the FAC."*fn59 Indeed, plaintiffs allege virtually identical involvement of KMG and Anadarko in the implementation of the MSA.*fn60 Moreover, Anadarko represented in its 2006 and 2007 Annual Reports that "'[a]s a result of the merger, we will be responsible to provide reimbursements to Tronox pursuant to the [MSA], and we may be subject to potential joint and several liability, as the successor to [KMG], if Tronox is unable to perform certain remediation obligations.'"*fn61 According to plaintiffs, as of June 29, 2010, and "pursuant to the [MSA]," Anadarko had paid Tronox approximately $4.1 million in environmental response costs, and it has reserved approximately $96 million in remaining reimbursement obligations.*fn62 Moreover, during a conference call on February 3, 2008, defendant Adams -- then-CEO of Tronox -- stated that, "under the [MSA], we continually have dialogues with Anadarko concerning our ongoing programs and legacy environmental [sic] . . . [W]e work with [Anadarko] continuously."*fn63

Together these allegations support an inference that Anadarko was deeply involved in Tronox's day-to-day operations*fn64 as they pertained to the transaction at issue -- Tronox's reporting of reserves -- and provide Anadarko with "fair notice"*fn65 of the control claim against it.*fn66

2. Respondeat Superior Liability

Plaintiffs also seek to establish Anadarko's liability on the basis of respondeat superior for KMG's primary violation "in controlling the reporting of Tronox's reserves."*fn67 Plaintiffs articulate their theory of respondeat superior liability in their Opposition brief:

Anadarko is properly alleged to be responsible for the tortious acts of its agent, KMG, in controlling the reporting of Tronox's reserves. The confidential witness allegations, and public statements of Tronox's CEO show that, following the merger, Anadarko allowed KMG to interact with Tronox in addressing the issues regarding Tronox's environmental reserves and remediation costs, including issues arising under the MSA. Anadarko at all times maintained control over these activities, especially in light of its acknowledged responsibility, as KMG's successor, to pay any remediation obligations which Tronox could not satisfy.*fn68

Anadarko argues that the paragraphs of the FAC on which this argument is based "relate only to KMG's alleged 'ability to exercise control' over Tronox -- not to Anadarko's relationship to KMG."*fn69 Instead, "the sole bases for Plaintiffs' allegation of a principal-agent relationship between Anadarko and KMG [in the FAC] are (i) Anadardo and KMG's 'parent-subsidiary relationship' and (ii) 'the merger agreement dated as of June 22, 2006'"*fn70 -- allegations insufficient to allege the existence of a principal-agent relationship.*fn71

Although plaintiffs' argument for liability based on respondeat superior may not be fully articulated in the FAC, they have "pl[ed] facts giving rise to a plausible inference that [KMG] possesses either actual or apparent authority to act on behalf of [Anadarko]."*fn72 Specifically, plaintiffs' allegations regarding the MSA and its implementation render plausible (1) that Anadarko consented to KMG's acting on its behalf in implementing the terms of the MSA and (2) that Anadarko controlled and directed KMG's actions.*fn73

First, plaintiffs' allegations support the inference that KMG was acting on Anadarko's behalf, with Anadarko's consent, in implementing the terms of the MSA. Given -- as defendant notes -- that "Anadarko is not even a party to the MSA,"*fn74 Anadarko's assumption of responsibility for KMG's reimbursement obligations pursuant to the MSA*fn75 raises the plausible inference that Anadarko consented to KMG's acting on its behalf in implementing the MSA's terms. Stated in terms of apparent authority, in light of Anadarko's "acknowledged responsibility, as KMG's successor, to pay any remediation obligations which Tronox could not satisfy,"*fn76 KMG "[held] itself out as possessing"*fn77 the authority to act on Anadarko's behalf in implementing the terms of the MSA.

Second, plaintiffs have adequately alleged that Anadarko controlled and directed KMG's actions in implementing the terms of the MSA. Plaintiffs have alleged Anadarko's "deep involvement . . . in the reserving process following its acquisition of [KMG] in August 2006."*fn78 That these allegations support the plausible inference that KMG controlled Tronox does not preclude a finding, at the motion to dismiss stage, that Anadarko also controlled and directed KMG. Given that Anadarko is not even a party to the MSA, Anadarko's "continuous attempts to influence the reserving process"*fn79 would necessarily result from its control and direction of KMG, the party to whom Tronox was required to deliver quarterly and annual reports and other public filings "in form and substance satisfactory to [KMG]."*fn80 Moreover, the statement by Adams during the February 2008 conference call -- that "under the [MSA], we continually have dialogues with Anadarko concerning our ongoing programs and legacy environmental [sic] . . . .

[W]e work with [Anadarko] continuously"*fn81 -- it is plausible that Anadarko not only controlled Tronox, but also directed and controlled KMG in the implementation of the MSA. For these reasons, Anadarko's motion to dismiss plaintiffs' respondeat superior claim is denied.

3. Successor-in-Interest Liability

a. Express or Implied Assumption of KMG's Liabilities

The FAC adds no material allegations on which to sustain plaintiffs' claim that Anadarko expressly or impliedly assumed KMG's liability for securities fraud actions relating to the Tronox IPO. Instead, the claim remains entirely based on (1) Anadarko's acknowledgment of its potential liability as a successor-in-interest to KMG for environmental remediation costs*fn82 and (2) Anadarko's contractual agreement, together with KMG, to indemnify KMG's officers and directors for their acts or omissions occurring before the acquisition date.*fn83 These allegations fail to state a claim for successor liability based on express or implied assumption of liabilities.*fn84

b. Fraud

Plaintiffs now claim that Anadarko is liable as a successor-in-interest to KMG because its merger with that company constituted the culmination of the fraud alleged in the FAC whereby the Legacy Liabilities were excised out of KMG and transferred to Tronox, for the purpose of allowing Anadarko to acquire KMG free and clear of such obligations. These transactions . . . were part of a deliberate plan, scheme, and artifice to defraud whereby the Legacy Liabilities were imposed on the public shareholders of Tronox without disclosure of their true magnitude and with the goal of KMG and Anadarko fraudulently escaping these liabilities.*fn85

Anadarko moves to dismiss this claim on the grounds that plaintiffs have "improperly conflated the merger with the IPO and Spin Off":*fn86 because the Legacy Liabilities were allegedly transferred to Tronox prior to the merger, Anadarko argues, the merger was not the "final step" in escaping the obligations arising from the Legacy Liabilities.*fn87 I agree. Plaintiffs' allegations do not support an inference that Anadarko's acquisition of KMG -- the "transaction" at issue in this claim -- was "fraudulent and intended to provide an escape from liability."*fn88

The fact that "Anadarko . . . knew that KMG had gone from billions of dollars in environmental remediation liabilities to effectively zero in a very short timeframe"*fn89 or that "[a]bsent KMG's ability to represent it had no or limited exposure, the merger would not have occurred"*fn90 does not support a theory that the merger was fraudulent.*fn91 This is because the "merger by which a so-called 'clean' KMG became a subsidiary of Anadarko could not possibly have 'provide[d] an escape from' the so-called 'Legacy Liabilities,' as the merger did not affect the ownership of those liabilities . . . in the first place."*fn92 Therefore, Anadarko's motion to dismiss plaintiffs' claim for successor liability is granted.

C. KMG Officers: Control Person Liability

In Count IV of the FAC, plaintiffs allege that Corbett (for the entire Class Period), Wohleber (through August 10, 2006), and Pilcher (through August 10, 2006) "were controlling persons of Tronox and the officers of Tronox . . . within the meaning of Section 20(a) of the Exchange Act."*fn93 As support for that claim, they allege that Corbett, Wohleber, and Pilcher, along with KMG, "devised and effectuated the fraudulent scheme and course of conduct alleged herein"; "created the plan to remove the Legacy Liabilities from [KMG] and place them into Tronox without making full and adequate disclosure[s]"; "planned and effectuated [KMG's] extrication from further association with Tronox except through a modest indemnification obligation reflected in the [MSA], by completing the Spin-Off"; "unilaterally determined the content of all material agreements between [KMG] and Tronox and dictated the terms of the transactions described hereinabove"; and "imposed" the MSA on Tronox.*fn94

Building on these allegations, plaintiffs argue that, as senior officers of (and/or general counsel for) KMG from March 31, 2006, to August 10, 2006 -- when KMG controlled Tronox by virtue of the MSA*fn95 -- Corbett, Wohleber, and Pilcher "continued to exercise control over Tronox."*fn96 Plaintiffs assert that these senior officers "can be presumed to have received reports regarding Tronox's ongoing environmental remediation work, the setting of the reserves, and to have directed KMG's positions vis-a-vis Tronox."*fn97 Because they were "responsible for and had knowledge of KMG's financial reporting, which included the reimbursement obligations and related amount of Tronox reserves," they controlled this aspect of Tronox's financial reporting "inasmuch as KMG" did.*fn98

Corbett and Pilcher now move to dismiss Count IV in full,*fn99 and Wohleber moves to dismiss Count IV for the period after March 31, 2006.*fn100 As an initial matter, I note that although the KMG Officers' motion divides the Class Period into three distinct periods of time for the purpose of analyzing plaintiffs' control allegations -- the time periods (1) between the IPO and the Spin-Off, (2) between the Spin-Off and the Merger, and (3) after the Merger -- plaintiffs make little distinction among these time periods. Below, I address in turn (1) the period of time from the IPO to the Merger and (2) the period of time after the Merger.

1. Control Person Liability from November 21, 2005 to March 31, 2006 (Corbett and Pilcher) and from April 1, 2006 to August 10, 2006 (Corbett, Pilcher, and Wohleber)*fn101

Defendants argue that Corbett's and Pilcher's "role as officers of KMG between the time of Tronox's IPO and Spin-Off" -- a period of time during which plaintiffs have alleged KMG controlled Tronox*fn102 -- "does not amount to an allegation of control under Section 20"*fn103 because [t]here are no allegations that [from November 21, 2005, to March 31, 2006] either Corbett or Pilcher owned a controlling amount of Tronox voting shares, were officers or directors of Tronox, were involved in the day-to-day activities of Tronox, or signed any of Tronox's filings. More specifically, there is no allegation that Corbett or Pilcher were involved in Tronox's reserve-setting process or the management of Tronox.*fn104

Therefore, according to defendants, plaintiffs' control claims boil down to mere assertions of Corbett's and Pilcher's "status" as officers of KMG, which is "generally not enough to constitute control."*fn105

Defendants similarly argue that plaintiffs' control argument for the period from March 31, 2006 to August 10, 2006, is a concession that their claim against Corbett, Pilcher, and Wohleber is based solely "'on [their] status as [] officer[s] of KMG.'"*fn106 Defendants argue that, because plaintiffs never suggest that unidentified KMG "personnel" or "employees" involved in the implementation of the MSA "included any of the named individual defendants," plaintiffs "do not and cannot assert that [Corbett, Pilcher, or Wohleber] had any hand in alleged exercises of control by KMG," rendering their control claims "impermissibly tertiary."*fn107

It is true that plaintiffs have not explicitly alleged the quintessential markers of control against Corbett, Pilcher, and Wohleber. For example, there is no allegation that from November 21, 2005 through March 31, 2006, either Corbett or Pilcher signed Tronox's allegedly fraudulent public filings,*fn108 or that any of the KMG Officers were directly involved in Tronox's day-to-day operations.*fn109

However, in light of plaintiffs' allegations (1) that Corbett, Pilcher, and Wohleber "devised and effectuated the fraudulent scheme"*fn110 and that (2) KMG controlled Tronox from the IPO to the Spin-Off to the Merger, I find their allegations sufficient to support the plausible inference that the KMG Officers had the "'power to direct or cause the direction of the management and policies of [Tronox]'"*fn111 during that time period.*fn112 Corbett and Pilcher may not have signed Tronox's filings during this time -- because they were not Tronox officers -- but they allegedly "created the plan to remove the Legacy Liabilities from [KMG] and place them into Tronox without making full and adequate disclosure[s]" and "dictated the terms of the [IPO],"*fn113 rendering plausible the inference that they had the power to control the content of Tronox's company press releases*fn114 and public filings.*fn115 Similarly, plaintiffs' allegations against all three officers during the time that KMG controlled Tronox via the MSA exceed mere "control person status." All three defendants allegedly "planned and effectuated [KMG's] extrication from further association with Tronox except through a modest indemnification obligation reflected in the [MSA], by completing the Spin-Off"; and "unilaterally determined the content of [the MSA]" and "imposed" it on Tronox.*fn116 When KMG was ultimately sold to Anadarko -- a transaction made possible by the allegedly fraudulent Spin-Off of Tronox orchestrated by these officers -- Corbett profited by over $270 million; Wohleber by roughly $26 million; and Pilcher by roughly $32 million.*fn117 Based on these allegations, it is plausible that these defendants had the power to, and in fact did, dictate Tronox's misleading environmental remediation reserves.*fn118

Such allegations place this case in stark contrast to those relied upon by defendants for the proposition that plaintiffs cannot state a claim based on "tertiary liability."*fn119 In Fezzani v. Bear, Stearns, & Co., plaintiffs sought to hold a senior officer of Bear Stearns, which in turn allegedly controlled the primary violator (Baron), "responsible based on tertiary liability -- his control of Bear Stearns, which in turn allegedly controlled Baron."*fn120 The court held that plaintiffs could not "stretch the concept of control liability so far."*fn121 However, in that case, the court had already dismissed plaintiffs' control claims against Bear Stearns as time-barred. If the court had reached the "merits" of plaintiffs' control allegations against Bear Stearns -- that it "took over Baron's offices and executed transactions, as well as approved or disapproved of all of Baron's trading orders after November 1995" and subsequently "assumed control of all trading activities at Baron and sent its employees to Baron's offices to enforce that control"*fn122 -- it may well have found that plaintiffs stated a claim against Bear Stearns, and seriously considered whether the senior officer, too, could be found to control Baron vis-a-vis his position at Bear Stearns. Even if it had not, the control allegations here are factually distinct from those at issue in Fezzani, because plaintiffs are alleging more than "[p]articipation, even significant participation, in [the primary violator's] scheme to defraud."*fn123 They are alleging that Corbett, Pilcher, and Wohleber were the masterminds behind a scheme to defraud that culminated in Tronox's Spin-Off from KMG, saddled with liabilities that Tronox's public filings continually understated throughout the Class Period.*fn124

Teamsters Local 445 Freight Division Pension Fund v. Bombardier Inc.*fn125 is also distinguishable. In that case, I held that an allegation that an individual defendant ("Beaudoin") was an officer and director of a parent corporation ("BI") of a primary violator ("BCM" and "BCI" (collectively "Bombardier")) was insufficient to plead a claim under Section 20(a).*fn126

The complaint alleged that Beaudoin, as a signatory of BI's Annual Reports, had direct knowledge of the "Certificate Offerings" that were reflected in BI's financial statements and incorporated in BI's Annual Reports.*fn127 I first rejected plaintiffs' primary securities fraud allegations against Beaudoin because "the Complaint does not allege that Beaudoin knew of information contradicting [BCM's and BCI's] public statements . . . . Nor does plaintiff allege that the Certificate Offerings were a core operation of BI."*fn128 By contrast, plaintiffs here have alleged that Corbett, Pilcher, and Wohleber -- who allegedly orchestrated the plan by which the Legacy Liabilities were excised from KMG and who "unilaterally determined the content of" the MSA which they "imposed" on KMG*fn129 -- knew of information contradicting the reserves reported by Tronox.*fn130 Moreover, unlike the KMG Officers in this case, Beaudoin was not alleged to have "controlled [BCM and BCI], nor [did plaintiffs] make any specific allegation of control against him other than his status as an officer and director."*fn131 Instead, the complaint merely "contain[ed] a number of allegations that the 'Individual Defendants' [including Beaudoin] had control over the 'the Company'"*fn132 -- which included BI, BCI, and BCM. Plaintiffs' allegations here go beyond such broad, conclusory assertions.*fn133

A company acts through its officers, and plaintiffs have alleged sufficient facts to support the inference that, as the perpetrators of the fraud and as senior officers of KMG, Corbett, Pilcher, and Wohleber effectuated the control injected into the relationship between KMG and Tronox (1) from the IPO to the Spin-Off (via stock ownership) and (2) from the Spin-Off to the Merger (via the MSA).*fn134

2. Corbett: Control Person Liability from August 11, 2006 to January 12, 2009 Plaintiffs do not explain their theory for how Corbett was a "controlling person" of Tronox after the August 10, 2006 merger.*fn135

Although Plaintiffs' basis for asserting control for this time period is entirely unstated, it can be inferred that it is based solely on the fact that Corbett became an outside director of Anadarko, whereas Pilcher and Wohleber had no role at Anadarko. Plaintiffs are apparently alleging that -- after Anadarko's acquisition of KMG -- Corbett, as an outside director, controlled Anadarko, which in turn is allegedly liable (as a successor-in-interest or on a theory of respondeat superior) for KMG's alleged control over Tronox.*fn136

This theory is "yet another step removed from 'control person' liability."*fn137

Plaintiffs have failed to articulate how Corbett continued to control Tronox -- vis-avis Anadarko vis-a-vis KMG -- beyond asserting his status as an outside director of Anadarko. In the absence of additional allegations, plaintiffs' Section 20(a) claim is too attenuated to state a claim against Corbett for control liability after the Merger.

IV. CONCLUSION


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