The opinion of the court was delivered by: John G. Koeltl, District Judge:
This is a securities action brought on behalf of a proposed class of acquirers of common stock or depository shares of EnergySolutions, Inc. ("ES" or the "Company") in or traceable to a November 14, 2007 initial public offering (the "IPO") or a July 24, 2008 offering (the "July 2008 Offering") (collectively, the "Offerings"). The lead plaintiffs allege causes of action against ES, 12 officers or directors of ES, ES's sole stockholder prior to the public offerings, and three underwriters under sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77k, 77l(a)(2), 77o; under section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 77j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; and under section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). The defendants move to dismiss the Second Amended Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6).
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the allegations in the complaint are accepted as true, and all reasonable inferences must be drawn in the plaintiff's favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007); Arista Records LLC v. Lime Group LLC, 532 F. Supp. 2d 556, 566 (S.D.N.Y. 2007). The Court's function on a motion to dismiss is "not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). The Court should not dismiss the complaint if the plaintiff has stated "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). While the Court should construe the factual allegations in the light most favorable to the plaintiff, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions." Id.; see also SEC v. Rorech, 673 F. Supp. 2d 217, 221 (S.D.N.Y. 2009).
A claim under Section 10(b) sounds in fraud and must meet the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b). Rule 9(b) requires that the complaint "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker,
(3) state where and when the statements were made, and (4) explain why the statements were fraudulent." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007). The PSLRA similarly requires that the complaint "specify each statement alleged to have been misleading[ and] the reason or reasons why the statement is misleading," and it adds the requirement that "if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1); see also ATSI, 493 F.3d at 99.
When claims under sections 11 or 12 of the Exchange Act "are premised on allegations of fraud," they must also satisfy Rule 9(b). Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004). If they sound in negligence, however, claims under sections 11 or 12 need only satisfy the less rigorous requirements of Federal Rule of Civil Procedure 8(a). See Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 717-18 (2d Cir. 2011), petition for cert. filed, 2011 WL 2593465 (U.S. June 28, 2011) (No. 11-15); see also In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d 611, 632 (S.D.N.Y. 2007).
When presented with a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents that are referenced in the complaint, documents that the plaintiffs relied on in bringing suit and that are either in the plaintiffs' possession or that the plaintiff knew of when bringing suit, or matters of which judicial notice may be taken. See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002); Rorech, 673 F. Supp. 2d at 221.
The following facts are undisputed, unless otherwise indicated.
ES was established to provide services such as engineering, spent fuel management, decontamination and decommissioning ("D&D"), and similar services to nuclear power plants and other commercial facilities. (Second Am. Compl. ("SAC") ¶ 51.) A group of investors at three investment companies -- Lindsay Goldberg; Peterson Partners L.P.; and Creamer Investments, Inc. (collectively, the "Sponsors") -- formed ES by purchasing and integrating existing companies in the radioactive waste disposal business through a company named ENV Holdings, Inc. ("ENV"). (SAC ¶¶ 2, 53-54.) At the time of the IPO, ENV was the sole stockholder of ES. (Youngwood Decl. Ex. A ("Nov. 2007 Reg. Stmt."), at 6.)
"Commercial nuclear services primarily consist of specialized nuclear fuel cycle services provided to the 104 operating nuclear reactors in the United States, as well as D&D services provided to the nuclear reactors that have been shut down." (SAC ¶ 52; Nov. 2007 Reg. Stmt. at 2; Youngwood Decl.
Ex. B ("July 2008 Reg. Stmt."), at 2.) According to ES's Registration Statements, ES held "life-of-plant" ("LOP") contracts with 82 of the country's 104 operating nuclear reactors, under which ES would "process and dispose of substantially all low-level radioactive waste, or LLRW, and mixed low-level waste, or MLLW, generated by their nuclear power plants, and ultimately the waste materials generated from the [D&D] of those plants." (Nov. 2007 Reg. Stmt. at 1; July 2008 Reg. Stmt. at 1.)
ES stated that one of its primary business strategies was to "[f]ocus on [d]ecommissioning of [s]hut-down U.S. [r]eactors." (Nov. 2007 Reg. Stmt. at 4; July 2008 Reg. Stmt. at 4; SAC ¶ 87.) Under Nuclear Regulatory Commission ("NRC") rules, an owner wishing to decommission a nuclear reactor can either (a) immediately dismantle the plant, (b) put the plant in safe storage while residual radioactivity decays ("SAFSTOR"), or (c) entomb radioactive material. (SAC ¶ 68.) The NRC allows for completion to span up to 60 years. (SAC ¶ 69.) Among other requirements, decommissioning activities cannot be conducted without specific prior NRC approval if they would "result in there being no reasonable assurance that adequate funds will be available for decommissioning." (SAC ¶ 73.)
The Registration Statements stated that ES was "actively marketing [its] D&D services for shut-down reactors to nuclear power and utility companies." (Nov. 2007 Reg. Stmt. at 4; July 2008 Reg. Stmt. at 4.) According to ES, 13 nuclear reactors were then in "various stages of shut-down" and maintained an aggregate pool of over $2.9 billion in dedicated decommissioning funds. (Nov. 2007 Reg. Stmt. at 4; July 2008 Reg. Stmt. at 4.) The Company stated that its "unique license stewardship initiative for shut-down reactors" (the "License Stewardship Initiative") gave it the potential to "accelerate D&D activities by several years" by obtaining an NRC license for a given reactor site, acquiring the site and the associated decommissioning fund from the owning utility, performing the necessary D&D work, and then returning the site to its original owner. (Nov. 2007 Reg. Stmt. at 4; July 2008 Reg. Stmt. at 4.) The Registration Statements said: "We believe that we are well- positioned to compete for this D&D outsourcing work." (Nov. 2007 Reg. Stmt. at 4; July 2008 Reg. Stmt. at 4.)
The Registration Statements identified thirteen nuclear reactors in particular that were "currently shut down and awaiting D&D" at the time of the IPO and the July 28 Offering. (Nov. 2007 Reg. Stmt. at 81; July 2008 Reg. Stmt. at 75.) In December 2007, the Company announced that it had entered into an agreement (the "Zion Agreement") to purchase the Zion power plant, including the assets in Zion's decommissioning trust fund. (Youngwood Decl. Ex. C ("Dec. 2007 Form 8-K"), at 2.)
The Zion plant included two of the thirteen reactors on ES' list. (Nov. 2007 Reg. Stmt. at 80; July 2008 Reg. Stmt. at 75.) ES, through a wholly owned subsidiary, would "complete the required decommissioning work according to an established schedule." (Dec. 2007 Form 8-K at 2.) This "Zion Project" was conditioned on ES delivering a $200 million letter of credit. (Dec. 2007 Form 8-K at 2.) In the Registration Statements and a December 2007 Form 8-K, ES represented the trust fund to contain between $858 and $860 million, or "approximately $900 million," in assets. (SAC ¶ 100; Nov. 2007 Reg. Stmt. at 81; July 2008 Reg. Stmt. at 75; Dec. 2007 Form 8-K at 2.)
ES also stated an intention to expand its commercial services business, particularly with companies with which it already had LOP contracts. The Registration Statements noted that "the NRC is reviewing a proposal to permit operators of nuclear reactors to access decommissioning funds for disposal of large components that have been retired from use in nuclear services," and stated a belief that "the adoption of this proposal would be a significant opportunity for [ES] to expand" its commercial services business. (Nov. 2007 Reg. Stmt. at 5; July 2008 Reg. Stmt. at 5.)
On October 14, 2008, the Company announced that the trust fund for Zion had significantly declined in value and the Company would not move forward with the Zion Project at that time, that the NRC had rejected the proposal for using decommissioning funds for the disposal of large components, and that ES's revenue and earnings estimates would need to be significantly reduced. (SAC ¶ 6.) The Company's stock fell 44% that day, and more than 60% overall in the following month. (SAC ¶¶ 6, 183.)
The lead plaintiffs in this case are City of Roseville Employees' Retirement System ("Roseville"), Building Trades United Pension Trust Fund ("Building Trades"), and New England Carpenters Guaranteed Annuity and Pension Funds ("Carpenters"). (SAC ¶¶ 22-24.) The lead plaintiffs propose to represent a class of all persons who acquired ES's common stock or depository shares in or traceable to the IPO or the July 2008 Offering and all purchasers of ES's common stock or depository shares between the November 14, 2007 IPO and October 14, 2008 announcement (the "Class Period"). (SAC ¶ 1.)
The plaintiffs allege that the Registration Statements and other statements made by the defendants contained false or misleading statements or omitted material facts related to five topics: (a) the impact of the LOP contracts on waste disposal opportunities; (b) opportunities in the shut-down nuclear reactor market; (c) the viability of the Zion Project; (d) the likelihood that the NRC would allow the use of decommissioning trust funds for the disposal of large components and that ES would obtain disposal contracts as a result; and (e) the potential adverse effects of macro-economic conditions. (Defs.' Mem. of Law in Supp. of Defs.' Mot. to Dismiss the SAC ("Defs.' Mem."), at 6-10.)*fn1
The Registration Statements stated that, under the LOP contracts, ES had "agreed to process and dispose of substantially all [LLRW] and [MLLW] generated by" 82 of the 104 operating nuclear reactors in the United States, along with, "ultimately[,] their D&D waste materials." (Nov. 2007 Reg.
Stmt. at 1, 5; July 2008 Reg. Stmt. at 1, 5.) According to the plaintiffs, those contracts "contained various provisions that were detrimental to the business prospects of the Company related to the large components business, including any business related to the NRC's approval of ES' Petition for Rulemaking, and the License Stewardship Initiative." (SAC ¶ 79.) The plaintiffs claim that the LOP contracts in fact "would hinder -- rather than help -- the generation of future revenues and business opportunities." (SAC ¶ 79.)
The Second Amended Complaint identifies three ways that the LOP contracts allegedly diminished ES's prospects. First, "ES agreed to charge an initial preferred and low price for certain types of waste materials accompanied by fixed price escalation during the term of the agreement." (SAC ¶ 80.) The LOP contracts required customers "to use ES to dispose of certain limited types of operational waste with ES -- such as Class A operational [LLRW] and a small portion of MLLW -- but [did not require customers] . . . to dispose of most types of MLLW." (SAC ¶ 80.) Because the price escalation rates in the LOP contracts were lower than the historic cost increases of waste disposal services and lower than the average rates of return on investments, the Second Amended Complaint alleges, "it was economically advantageous for a customer to invest its funds, place its waste in storage, and defer the disposal of waste into the distant future." (SAC ¶ 81.) Thus, the plaintiffs contend, the LOP contracts negatively affected "near-term spending on disposal . . . which was contrary to Defendants' statements . . . of an attractive business opportunity for ES for the disposal of waste." (SAC ¶ 81.)
The plaintiffs allege that ES analyzed this issue and "proved it was more economically advantageous for customers to invest their capital and put off disposing of their waste at ES." (SAC ¶ 82.) The Second Amended Complaint provides one specific example of a power plant that "would have saved $600,000 if it invested its $6.6 million and then disposed of its waste in 20 years." (SAC ¶ 83.)
Additionally, the plaintiffs allege, it was misleading to state that ES had "agreed to process and dispose of substantially all . . . MLLW" because ES had agreed only "to dispose of the small portion of MLLW described as Macro Exposure" and not "the vast majority of MLLW, including services for Stabilization, Thermal Treatment and Solidification of MLLW." (SAC ¶¶ 152-53.) Further, although ES stated that it "typically expect[ed] the duration of these contracts to be approximately 30 years," each LOP contract was set to reopen for renegotiation of price terms and other terms between 2015 and 2017. (SAC ¶ 153.) 2.
The plaintiffs next allege that the shut-down reactor market actually presented few opportunities for D&D. The Registration Statements described a "unique stewardship initiative" for shut-down reactors whereby ES could "potentially accelerate D&D activities by several years." (Nov. 2007 Reg. Stmt. at 4; July 2008 Reg. Stmt. at 4.) The Second Amended Complaint alleges that "most of the potential market for the license stewardship program was non-existent -- at least for many, many years." (SAC ¶ 90.)
The NRC requires a sufficient decommissioning trust fund before major decommissioning activities may proceed. According to the plaintiffs, four of the five companies that the defendants specifically identified as being among its commercial customers had "Trust Fund shortfalls of hundreds of millions of dollars at the time of the IPO and a combined shortfall of approximately $1 billion by the time of the July 2008 Offering." (SAC ¶¶ 90, 92.)
The Registration Statements specifically identified thirteen reactors that were "currently shut down and awaiting D&D," and noted that "[a]lthough contracts for the D&D of these reactors have not yet been awarded, we have established relationships with some of the owners of these reactors and believe that we are well-positioned to pursue these contracts when they are made available." (Nov. 2007 Reg. Stmt. at 81; July 2008 Reg. Stmt. at 75.) The Registration Statements stated that their combined trust fund balances were $2,924 billion at the time of the IPO and $3,123 billion at the time of the July 2008 Offering. (Nov. 2007 Reg. Stmt. at 81; July 2008 Reg.
In reality, the plaintiffs allege, "many of these facilities were a long way from any major decommissioning activities, were under the control of an owner-operator that had deficient trust funds, were already under the control of the existing owner-operator for decommission activities and therefore would not be interested in the License Stewardship Initiative, or would not generate significant decommissioning revenues." (SAC ¶¶ 93-94.) The Second Amended Complaint alleges that two of the companies responsible for reactors with decommissioning trust funds of over $550 million in total had already informed ES that they were not interested in ES's license stewardship initiative; two companies responsible for reactors with decommissioning trust funds of over $440 million had already begun decommissioning activities without using ES; and many reactors were not likely to begin decommissioning until 2020 or later. (SAC ¶ 94.)
The plaintiffs further allege that the cumulative decommissioning trust funds rapidly decreased in value during the Class Period. (SAC ¶ 95.) They also allege that "ES did not have the manpower to take on more than one License Stewardship at a time." (SAC ¶ 96.) In summary, the Second Amended Complaint alleges, "[t]he shut-down reactor market represented by Defendants did not reflect the real near-term or even medium-term business opportunity for the License Stewardship Initiative -- which was close to zero." (SAC ¶ 96.)
The plaintiffs next allege that the Zion Project could not move forward because "the decommissioning trust fund at Zion (the 'Zion Trust Fund') was not sufficient to fund the cost of decommissioning." (SAC ¶ 98.) In a December 11, 2007 press release, ES stated that it "d[id] not expect that conditions to the completion of the transactions [underlying the Zion Project would] be satisfied before the second half of 2008." (SAC ¶ 226.) In a March 18, 2008 conference call, the Company's Chief Financial Officer ("CFO"), Phillip O. Strawbridge ("Strawbridge"), stated that ES anticipated "more active decommissioning" of Zion to begin in the fourth quarter of 2008. (SAC ¶ 239.) In an August 11, 2008 conference call, Strawbridge refined that estimate to an "October 1 start date." (SAC ¶ 269.)
The November 2007 Registration Statement said that the Zion Trust Fund was worth $858 million; the December 2007 Form 8-K, "approximately $900 million"; and the July 2008 Registration Statement, $860 million. (SAC ¶ 100; Nov. 2007 Reg. Stmt. at 81; July 2008 Reg. Stmt. at 75; Dec. 2007 Form 8-K at 2.) However, the plaintiffs allege that as of November 30, 2008, over a month after the close of the Class Period, the balance in the trust fund was approximately $727 million. (SAC ¶ 100.) According to a confidential witness who worked for ES "in cost accounting on the decommissioning project for Zion, . . . the Zion Trust Fund had declined in value by May 2008." (SAC ¶ 101.)
Moreover, the plaintiffs allege, even the balances represented in the Registration Statements were inadequate to cover the expenses for the Zion Project. The Second Amended Complaint states that Exelon, Zion's owner, estimated that decommissioning would cost "approximately $1.091 billion" and that decommissioning could not commence at that time. (SAC ¶103.) ES similarly estimated that decommissioning would cost $978 million. (SAC ¶ 104.)
Along with the trust fund issues, the plaintiffs allege, ES could not begin decommissioning Zion "until late 2010 at the earliest, in part due to issues with spent fuel." (SAC ¶ 105.) And even if decommissioning could proceed, "the terms of the agreement with Zion required that any cost savings achieved by ES would have to be passed back to Exelon." (SAC ¶ 106.) Nevertheless, the defendants "included revenues from the Zion project in [their] financial outlook for 2008." (SAC ¶ 105.)
The Registration Statements also represented that the NRC was "reviewing a proposal to permit operators of nuclear reactors to access decommissioning funds for disposal of large components that have been retired from use in nuclear reactors" at facilities that remained operational. (Nov. 2007 Reg. Stmt. at 5; July 2008 Reg. Stmt. at 5.) They stated that the defendants believed that "the adoption of this proposal would be a significant opportunity for [ES] to expand" its commercial services business. (Nov. 2007 Reg. Stmt. at 5; July 2008 Reg. Stmt. at 5.) CFO Strawbridge stated in a conference call on May 13, 2008 that ES "expect[ed] the NRC to change their rule . . . . before the fourth quarter of , or around the fourth quarter." (SAC ¶ 254.) ES's Chief Executive Officer ("CEO") and the Chairman of its Board of Directors, R. Steve Creamer ("Creamer"), stated at an August 11, 2008 conference call that he was "comfortable" and "confident" that the petition would be approved. (SAC ¶ 271.) The plaintiffs allege that these statements were materially false or misleading because it was against NRC rules to use decommissioning trust funds to dispose of large components and the NRC was "virtually certain" to reject the proposal. (SAC ¶ 110.)
Since 1983, the NRC had prohibited operational facilities from accessing decommissioning trust funds prior to plant shutdown. (SAC ¶¶ 109, 117-18.) The costs of removing, disposing, or storing large components had to come instead from operating funds. (SAC ¶¶ 112-13.)*fn2 ES sought to change this rule by filing a Petition for Rulemaking with the NRC. (SAC ¶ 111.)
Since 1983, the NRC had repeatedly reinforced the original rule or rejected proposals to eliminate it. In 1988, the NRC tightened restrictions on the use of funds allotted for decommissioning. (SAC ¶ 122.) The NRC reiterated, clarified, or strengthened the rule at least six separate times between 1988 and 2001. (SAC ¶¶ 122-33.) It also rejected a similar proposal in 1995. (SAC ¶ 128.) Then, in 2004, the DC Cook Plant filed a petition that was "almost identical" to the one ES would file three years later, only to withdraw the petition to "save face" after being informed by the NRC that the petition "was against longstanding NRC policy and that the NRC would reject the petition." (SAC ¶ 135.) The Second Amended complaint alleges that ES had first-hand knowledge of the reason for this withdrawal. (SAC ¶ 136.) Moreover, according to the Second Amended Complaint, eight utilities told ES that they "did not believe the Petition would be approved, and that even if the Petition was approved they would not retain ES for disposal of large components." (SAC ¶ 138.)
The NRC rejected ES's petition sometime prior to October 14, 2008. (SAC ¶¶ 140-42, 182.)
Finally, the Second Amended Complaint alleges that "declining economic conditions were negatively impacting the Company's Federal contracts side of the business" as early as January and February 2008, leading to "a decline in ES' business in the 2007-08 timeframe." (SAC ¶ 143.) Economic conditions also decreased the value of decommissioning trust funds, negatively impacting the potential of the License Stewardship Initiative. (SAC ¶ 144.)
The plaintiffs sue a number of defendants for these alleged misstatements. First, they sue ES itself. Second, they sue ENV. ENV held 100% of the shares of the Company prior to the IPO; during the IPO and the July 2008 Offering, ENV sold approximately 80% of its shares in return for over $1.2 billion, and subsequently transferred the remainder of its shares to its members. (SAC ¶¶ 2, 55, 66, 284.)
Third, they sue Credit Suisse Securities (USA) LLC, J.P Morgan Securities Inc., and Morgan Stanley & Co. Incorporated (collectively, the "Underwriter Defendants"), each of which allegedly "acted as a lead underwriter . . . and helped to draft and disseminate the Prospectuses for the two Offerings." (SAC ¶¶ 39-41.) The Second Amended Complaint alleges that the Underwriter Defendants did not "ma[k]e a reasonable investigation or possess reasonable grounds for the belief that the statements . . . in the Registration Statements and Prospectuses . . . were true, were without omission of any material facts, and/or were not misleading." (SAC ¶ 194.)
Fourth, the plaintiffs sue eleven individuals who served as directors and/or officers of ES. (SAC ¶¶ 26-38.)*fn3 These Individual Defendants are ES's Chairman and CEO Creamer; Strawbridge, Executive Vice President and CFO of ES; Jean I. Everest II ("Everest"), Vice Chairman of ES's Board of Directors; Mark C. McBride ("McBride"), Senior Vice President and Corporate Controller of ES; Lance L. Hirt, a director of ES and, until November 2007, Chairman of the Board; David B. Winder ("Winder"), Jordan W. Clements, and Andrew S. Weinberg, directors of ES; and Alan E. Goldberg, Robert D. Lindsay, and Robert J.S. Roriston ("Roriston"), directors until October 1, 2008. (SAC ¶¶ 26-37.) (Except as otherwise noted, the positions listed were held throughout the Class Period.) In addition, several defendants had relationships with one of the Sponsors: Creamer was a founder of Creamer Investments, Inc., and Everest was ...