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Fries v. Northern Oil and Gas, Inc.

United States District Court, S.D. New York

January 10, 2018

JEFFREY FRIES, Individually and On Behalf of All Others Similarly Situated, Plaintiff,
v.
NORTHERN OIL AND GAS, INC., MICHAEL L. REGER, and THOMAS W. STOELK, Defendants.

          OPINION AND ORDER

          EDGARDO RAMOS, U.S.D.J.

         This class action arises out of alleged violations of the Securities Exchange Act of 1934 by Northern Oil and Gas, Inc. (“Northern Oil”), Michael L. Reger (“Reger”), and Thomas W. Stoelk (“Stoelk, ” collectively, the “Defendants”). Lead plaintiff Matthew Atkinson (“Plaintiff” or “Atkinson”) asserts causes of action individually and on behalf of others similarly situated against Defendants for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. Plaintiff generally alleges that Defendants made false and misleading statements in their public filings and comments. Before this Court is Defendants' motion to dismiss the Consolidated Amended Complaint (“CAC”) in its entirety pursuant to the Federal Rule of Civil Procedure 12(b)(6).

         For the reasons set forth below, Defendants' motion is GRANTED without prejudice.

         I. Background

         A. Factual Background[1]

         1. Parties

         Plaintiff brings this action individually and on behalf of all persons, other than Defendants, who purchased or otherwise acquired Northern Oil securities from March 1, 2013 to August 15, 2016 (the “Class Period”). CAC ¶ 1.

         Northern Oil is an independent energy company engaged in the acquisition, exploration, development, and production of oil and natural gas properties in the United States, primarily holding interests in the Williston Basin of North Dakota and Montana. Id. ¶¶ 2, 31. It was co-founded by Reger and Ryan Gilbertson (“Gilbertson”), a non-party, in 2006. Id. ¶¶ 4-5, 32. In 2007, Northern Oil became a public company through a reverse merger whereby it merged into a company that had publicly-traded stock. Id. ¶ 33. It is incorporated in Minnesota and is headquartered in Wayzata, Minnesota. Id. ¶¶ 3, 25.

         The two individual Defendants occupied executive positions at Northern Oil during the Class Period. Reger served as Northern Oil's Chief Executive Officer (“CEO”) from 2007 until his termination on August 16, 2016. Id. ¶ 26. Reger sold over 550, 000 shares of Northern Oil common stock during the Class Period for tax purposes. Id.; Doc. 41 (“Hammel Decl.”) Ex. 20-36. Stoelk served as Northern Oil's Chief Financial Officer (“CFO”) at all relevant times, and became the interim CEO upon Reger's termination. CAC ¶ 28. Stoelk sold over 78, 000 shares of Northern Oil common stock during the Class Period for tax purposes. Id.; Hammel Decl. Ex. 4-19.

         2. Reger's Conduct at Dakota Plains

         In 2008, Reger and Gilbertson co-founded another company named Dakota Plains Transport Inc., which became a public company named Dakota Plains Holdings, Inc. (“Dakota Plains”) on March 22, 2012. CAC ¶ 34. Dakota Plains, a non-party, is a “transloading” facility that loads crude oil into railway cars in New Town, North Dakota, and is wholly unrelated to Northern Oil. Id. ¶¶ 5, 29. It is a Nevada corporation with its principal executive offices in Wayzata, Minnesota. Id. ¶ 29.

         Plaintiff alleges that Reger and Gilbertson improperly exercised control over Dakota Plains. Id. ¶¶ 5, 35-51. Specifically, when Dakota Plains became a public company, Reger controlled 21.4% of its stock and 33.3% of its promissory notes, and Gilbertson controlled 11% of its stock and 38.9% of its promissory notes. Id. ¶¶ 26-27. However, in order to conceal the full extent of their involvement, they did not hold any formal positions at Dakota Plains. Id. ¶ 36. Instead, they named Reger's father as CEO and Gilbertson's father as President, and later installed one of their friends as CEO. Id. ¶¶ 36, 40. Reger also held his Dakota Plains stock in ten different accounts over which he had beneficial ownership, with each account holding no more than 5% of the stock. Id. ¶¶ 48-51. Without disclosing their control or ownership, Reger and Gilbertson used their influence to improperly obtain financial benefits for themselves, including through a stock manipulation scheme.[2]

         On February 20, 2015, Dakota Plains reported Reger and Gilbertson's potential violations of securities laws at that company to the United States Securities and Exchange Commission (“SEC”). Id. ¶ 52. Thereafter, the SEC sent Reger a Wells Notice[3] in connection with the Dakota Plains investigation. Id. ¶¶ 15, 109. On August 16, 2016, after Reger informed Northern Oil of the Wells Notice, Northern Oil terminated Reger. Id. On that day, Northern Oil stock fell by 6.28%. Id. ¶ 110. On October 31, 2016, the SEC issued a cease and desist order against Reger concerning his role at Dakota Plains, in which he agreed to cease and desist from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, and Sections 13(d) and 16(a) of the Securities Exchange Act of 1934; and to make disgorgement and penalty payments. Id. ¶ 111; see Hammel Decl. Ex. 3.

         3. Reger's Conduct at Northern Oil

         Plaintiff claims that, during the Class Period, Reger neglected his responsibilities as the CEO of Northern Oil, and instead, appropriated Northern Oil resources to further his control of Dakota Plains. CAC ¶ 55. Plaintiff relies on three confidential witnesses (“CWs”). CW 1, a former executive assistant at Northern Oil headquarters from January 2009 through September 2015 who reported directly to Reger, asserts Reger went to the Northern Oil headquarters in Wayzata, Minnesota three or four days a week for brief periods of time, and that Stoelk effectively ran Northern Oil during Reger's last few years at the company. Id. ¶ 58. At Northern Oil headquarters, Reger worked on Dakota Plains matters, including holding meetings with Dakota Plains directors and investors. Id. ¶¶ 60-61. CW 1 “regularly ferried Dakota Plains-related personnel . . . to and from Northern Oil headquarters.” Id. ¶ 61. Reger also used Northern Oil sponsored tours of Northern Oil facilities in North Dakota to pitch hedge funds and other investment entities on Dakota Plains. Id. ¶ 62.

         CW 2, a former vice president of engineering at Northern Oil headquarters from November 2011 through November 2015 who reported directly to Reger and Stoelk, states that Reger had little to no involvement in the day-to-day operations at Northern Oil, and instead, spent most of his time pursuing acquisitions or working on matters related to Dakota Plains. Id. ¶ 64. He further attests that Reger's role at Dakota Plains was an open secret at Northern Oil, of which Stoelk was aware. Id. ¶¶ 65-66.

         CW 3, a former vice president of operations for Dakota Plains in Wayzata, Minnesota from April 2012 to February 2013, recalls spending more time in Northern Oil's offices than Dakota Plains' own offices, which was located half a block away from Northern Oil's headquarters. Id. ¶¶ 53, 71. He states that “Dakota Plains functioned under the direction of Northern Oil.” Id. ¶ 71.

         4. Defendants' Alleged False or Misleading Representations

         Plaintiff alleges that, in light of Reger's misconduct, Defendants made fraudulent representations and omissions in their public filings and other public comments. Specifically, Northern Oil stated in each of its Form 10-Ks for the years ended December 31, 2012, December 31, 2013, December 31, 2014 and December 31, 2015 that it “adopted a Code of Business Conduct and Ethics that applies to [Northern Oil's] chief executive officer, chief financial officer and persons performing similar functions [and that a] copy is available on [Northern Oil's] website at www.northernoil.com.” Id. ¶¶ 74, 89, 98, 103. Reger and Stoelk signed certifications as to the accuracy of each of these public filings. See Northern Oil and Gas, Inc., Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Form 10-K) (March 1, 2013); Northern Oil and Gas, Inc., Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Form 10-K) (March 3, 2014); Northern Oil and Gas, Inc., Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Form 10-K) (February 27, 2015); Northern Oil and Gas, Inc., Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Form 10-K) (March 3, 2016). Northern Oil's Code of Business Conduct and Ethics states in relevant part the following:

• “It is the policy of [Northern Oil] that all employees and directors comply strictly with all laws governing its operations and to conduct its affairs in keeping with the highest moral, legal and ethical standards. In particular, senior executives hold an important and elevated role in maintaining a commitment to (i) honest and ethical conduct; (ii) full, fair, accurate, timely and understandable disclosure in [Northern Oil]'s public communications, and (iii) compliance with applicable government rules and regulations.” Id. ¶ 75 (emphasis omitted).
• “[Northern Oil] proactively promotes ethical behavior. Employees should report violations of applicable laws, rules and regulations, this Code or any other code, policy or procedure of [Northern Oil] to appropriate personnel. Officers of [Northern Oil] should report any such violation directly to the chief executive officer and/or the chief financial officer. Employees and directors are expected to cooperate in internal investigations of misconduct.” Id.
• “All employees and directors should protect [Northern Oil]'s assets and ensure their efficient use. All [Northern Oil] assets should be used for legitimate business purposes only. The use of assets of [Northern Oil] for any unlawful or improper purpose is strictly prohibited. Theft, carelessness, and waste have a direct impact on [Northern Oil]'s profitability.” Id.
• “A conflict of interest exists where one or both parties in a relationship receive or give unfair advantage of preferential treatment because of the relationship and the term ‘conflict of interest' describes any circumstance that could cast doubt on a person's ability to act with total objectivity with regard to [Northern Oil]'s interest. Conflicts of interest are prohibited as a matter of [Northern Oil] policy. . . . All employees must conduct business in a manner that avoids even the appearance of conflict between personal interests and those of [Northern Oil]. . . . Also, employees are prohibited from directly or indirectly competing, or performing services for any person or entity in competition with, [Northern Oil].” Id.

         Plaintiff asserts that these statements are materially false and/or misleading because (1) Northern Oil's policies and Code of Business Conduct and Ethics were inadequate to either detect or prevent misconduct by Northern Oil officers, (2) Reger's misconduct violated Northern Oil's assurance to investors that its executives would maintain honest conduct and adhere to applicable laws and regulations, (3) Reger's blatant misuse of Northern Oil's assets violated Northern Oil's commitment to investors to safeguard those assets for legitimate purposes, and (4) Reger's involvement in Dakota Plains violated Northern Oil's prohibition of conflicts of interest. Id. ¶¶ 78, 93, 102, 106.

         Defendants also made certain representations concerning Reger's personal experience in the oil industry. Specifically, Northern Oil made the following alleged ...


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