Mooney v. Pioneer Natural Resources Company

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
MATTHEW B. MOONEY, )
) C.A. No. Nl7C-01-225 RRC
Plaintiff, )
)
V. )
)
PIONEER NATURAL RESOURCES )
COMPANY, )
)
)
Defendant. )
)
Submitted: July 27, 2017
Decided: October 24, 2017
On Defendant Pioneer Natural Resources Company’s Motion to Dismiss.
GRANTED, WITH LEAVE FOR PLAINTIFF TO AMEND THE
COMPLAINT.
MEMORANI)UM OPINION
MattheW B. Mooney, Esquire, Old Greenwich, Connecticut, pro se.
William M. Lafferty, Susan W. Waesco, and Richard Li, Morris, Nichols, Arsht &
Tunnell LLP, Wilmington, Delaware; Kevin T. Abikoff and Benjarnin Britz,
Hughes Hubbard & Reed LLP, Washington, DC, pro hac vice, Attorneys for
Defendant Pioneer Natural Resources Company.
COOCH, R.J.
I. INTRODUCTION
This is a one count common law fraud action brought by Matthew Mooney
(“Plaintiff’) against Pioneer Natural Resource Company (“Defendant”) alleging
fraudulent misrepresentation of financial performancel Plaintiff asserts that, as a
result of his detrimental reliance on various quarterly reports and public statements
of Defendant, he “suffered a financial loss.”2 Plaintiff’s claim rests on the assertion
that Defendant fraudulently misrepresented its financial stability in several instances
in order to induce investors to buy its securities.3 Defendant argues that Plaintiff
invested during a downturn in commodity prices and is now utilizing “a scattered,
one-count common law fraud” claim to recoup his investment4
The issue at this stage is whether Plaintiff has met the heightened pleading
standard of Delaware Superior Court Civil Rule 9(b) by having pled a claim for
common law fraud with adequate particularity. Defendant has moved to dismiss for
failure to state a claim pursuant to Delaware Superior Court Rule 12(b)(6).
This Court concludes that Plaintiffs complaint fails to meet the heightened
pleading standard of Rule 9(b). The Court thus grants Defendant’s motion to dismiss,
without prejudice with leave for Plaintiff to amend the complaint.
II. FACTS AND PROCEDURAL HISTORY
Plaintiff is an investor who allegedly invested in “securities [of Defendant]
and suffered a financial loss.”5 Defendant is “an oil and gas exploration and
production company incorporated in Delaware.”6
The facts are somewhat complex (additional facts are set forth in the
“Discussion” section) but may be essentially summarized as follows: Defendant
regularly made quarterly public disclosures regarding its commodity derivative
portfolio.7 Defendant made such a disclosure on January 6, 2015 via a news release.8
lPl.’s Compl. il l.
2 Ia’.
3 Id.
4 Def.’s Op. Br. in Support of its Mot. to Dismiss at 1-2.
5 Pl.’s Answ. Br. at 7.
6 Def.’s Op. Br. in Support of its Mot. to Dismiss at 1.
7 Ia'. at 3.
8 Id.
In that January 2015 disclosure, Defendant announced that it had updated its
commodity derivative schedule by converting approximately 85% of its 2015 oil
derivative contracts from three-way collars to fixed-price swaps.9 Specif`ically, the
Chief Executive Officer of Defendant, Scott D. Sheffield (“Sheffield”) stated:
Over the past five years, our derivative strategy has successfully protected our cash
flow and allowed us to execute a highly productive drilling program. In light of the
weak oil price environment forecasted for 2015, we elected to convert most of our
2015 oil derivatives from three-way collars to fixed-price swaps to establish a firm
oil price floor and lock in the corresponding cash flow. Pioneer’s adjusted
derivative portfolio, combined with our exceptional assets and strong balance sheet,
positions the Company to manage through the current price downturn and emerge
as an even stronger company when oil prices recover. '0
Defendant released its fourth quarter (“Q4”)ll results in a press release on
February 10, 2015.12 Defendant disclosed in its fourth quarter statement that its 2015
capital budget would be funded both by operating cash flow of $1 .7 billion and cash
on hand of$1.0 billion.'3
On May 5, 2015, Defendant released its Q1 2015 results via a press release,
which reported a net loss of $78 million and also that Defendant’s cash and cash
equivalents had decreased from $1.025 to $383 million.14 Sheffield stated that
Defendant was “maintaining a strong balance sheet at the end of the first quarter
with $3 83 million of cash on hand and a net debt-to-book capitalization of 2 1%.”15
On May 22, 2015, Plaintiff “established an investment position in Defendant’s
securities.l6 The nature of this “investment position” was not alleged. Plaintiff
“extended his investment” on eight separate occasions between May 29, 2015 and
August 4, 2015.'7
9 See id.; see also Pl.’s Answ. Br. at 7.
10 Pl.’s Comp1.1114.
" Hereinafter “Quarter” will be referred to by “Q” followed by a number, 1 through 4, to identify
which quarter of the year.
'2 Def.’s Op. Br. in Support ofits Mot. to Dismiss at 4; Pl.’s Answ. Br. at 8.
'3 Def.’s Op. Br. in Support of its Mot. to Dismiss at 4; Pl.’s Answ. Br. at 8-9.
'4 Def.’s Op. Br. in Support ofits Mot. to Dismiss at 5.
15 Pl.’s Answ. Br. at 9 (internal brackets omitted).
'(’ Pl.’s Answ. Br. at 10; Def.’s Op. Br. in Support of its Mot. to Dismiss at 6.
17 Pl.’s Compl.1l 30-41.
Defendant provided an update on its production and derivatives hedging
program for Q2 of 2015, on July 22, 2015.'8 Defendant stated that it had “continued
to strengthen its commodity derivatives position in order to protect the Company’s
cash flow. Current derivatives coverage for forecasted oil production is
approximately 90% and 75% for 2015 and 2016, respectively. Derivatives coverage
for forecasted gas production is approximately 85% and 65% for 2015 and 2016,
respectively.” l 9
Defendant reported Q2 2015 results on August 4, 2015, which showed another
decrease in its cash balance.20 Defendant earned S.lO/share on $648 million of
revenue.2l
On August 7, 2015, Plaintiff partially divested himself of his position in
Defendant’s securities.22 On August 24, 2015 (a day apparently known as “Black
Monday,” when “world stock markets crashed and U.S. markets suffered their
biggest sell-off in four years”),23 Plaintiff fully divested himself of Defendant’s
securities.24 On January 19, 2017, Plaintiff brought this lawsuit.25
III. THE PARTIES’ CONTENTIONS
A. Defendant ’s Contentl`ons
Defendant’s overarching contention is that “[h]aving timed his investment
decisions poorly, Plaintiff hunts for someone to blame.”26
Defendant argues that Plaintiffs claim must be dismissed because he has
failed to adequately plead a claim for common law fraud with the requisite
particularity, pursuant to Delaware Superior Court Civil Rule 9(b). Defendant
alleges that Plaintiff has failed to articulate a cause of action for each of the five
common law fraud factors: (1) a false representation made by the defendant; (2) the
18 Def.’s Op. Br. in Support of its Mot. to Dismiss at 6; Pl.’s Answ. Br. at 11.
'9 Pl.’s Answ. Br. at 11; Pl.’s Compl.1l 39.
20 Def.’s Op. Br. in Support of its Mot. to Dismiss at 7.
2' Pl.’s Answ. Br. at 11.
22 Id.; Def.’s Op. Br. in Support of its Mot. to Dismiss at 8.
23 Def.’s Op. Br. in Support of its Mot. to Dismiss at 1.
24 Pl.’s Answ. Br. at 11; Def.’s Op. Br. in Support ofits Mot. to Dismiss at 8.
25 See generally Compl.
26 Def.’s Op. Br. in Support of its Mot. to Dismiss at 1.
defendant's knowledge or belief that the representation was false, or reckless
indifference to the truth; (3) an intent to induce the plaintiff to act or to refrain from
acting; (4) the plaintiffs action or inaction taken in justifiable reliance upon the
representation; and (5) causally related damages to the plaintiff
First, Defendant argues that Plaintiff has failed to plead that Defendant made
any false representations.27 Defendant argues that Plaintiff has failed to identify
actionable false statements in the financial data from Defendant’s news releases or
the forward-looking statement from Sheffield in those news releases.28
Second, Defendant contends that Plaintiff has failed to allege Defendant’s
knowledge of the falsity of its statements.29 Defendant argues that because Plaintiff
merely “resorts to conclusory statements of knowledge by” Defendant, the
knowledge element was not adequately pled.30
Third, Defendant argues that the complaint must be dismissed because it fails
to allege intent or scienter.31 Defendant claims that because Plaintiff has failed to
identify a securities offering that occurred during the period of Plaintiff s
investments in Defendant, Plaintiff has failed to allege an intent to induce
investment.32 Also, Defendant argues that Plaintiff makes out an ipso facto claim
that suggests that because Plaintiff lost money by investing in Defendant, Defendant
must have committed fraud.33 Defendant argues that mental states may not be
inferred, “in a backwards-looking way, from after-the-fact lower-than expected
company performance.”34
Fourth, Defendant asserts that Plaintiff failed to adequately allege justifiable
reliance because Plaintiff at no point in his complaint explains why it was reasonable
to invest because of “announcements reflecting soft corporate optimism rather than
hard data[.]”35 Also, Defendant argues that financial disclosures showing declining
cash positions were available to Plaintiff at the time he chose to invest.36
27 Def.’s Op. Br. in Support of its Mot. to Dismiss at 15.
28 ]d
29 Id. at 20.
30 Id. at 21.
31 101
32 Id. at 22,
33 Def.’s Reply Br. in Support of its Mot. to Dismiss at 15.
34 1d.at15-16.
35 Def.’s Op. Br. in Support ofits Mot. to Dismiss at 25.
36 Id
Fifth, Defendant argues that Plaintiff has failed to properly allege damages in
his complaint because he has failed to identify the nature of his investment37
Defendant essentially contends that, without knowledge of the specific transactions
that Plaintiff made, it is impossible to determine the damage that he suffered as a
result of those transactions38 Further, Defendant argues that Plaintiff failed to plead
that his damages were a result of his alleged reliance.
B. Plaintiyj"s Contentions
Plaintiff’ s argument in his unduly dense Answering Brief, and also at oral
argument, is essentially that Defendant committed fraud by making statements that
is “was hedging using derivatives to reduce risk, when in fact, it was actually taking
on risk.”39
Plaintiff contends that he has adequately pled the “who, what, when, where
and how” of his fraud claim.40
First, Plaintiff argues that Sheffield’s January 6, 2015 statement that
Defendant’s strategy to “establish a firm oil price floor and lock in corresponding
cash flow” was “fraudulent” because Defendant’s hedge failed to do either of those
things.41 Also, Plaintiff contends that he has adequately alleged Defendant’s
misrepresentations because Defendant made allegedly misleading statements
regarding cash flow and the use of cash to fund capital spending.42 Plaintiff argues
that “[i]n reality, cash on hand was not simply ‘helping’ fund capital spending.
Capital spending was burning through cash on hand such that Defendant had to issue
12,000,000 new shares, raising $1,404,000,000, on January 5, 2016.”43
37 Id. at 26-27.
38 Id
39 Tr. of Oral Arg. at 36; see also ia’. 39 (PLAINTIFF: “The hedges were presented to the
marketplace as something done to risk-mitigate, or reduce risk. In reality, they were risk-taking or
risk-increasing[.]”).
40 Pl.’s Answ. Br. at 18 (quoting Crowhorn v. Nationwl'a’e Mut. Ins. Co., 2001 WL 695542, at *4
(Del. Super. Ct. Apr. 26, 2001)).
4' Ia’. at 20.
42 Id. at 21.
43 101
Second, Plaintiff contends that he has adequately pled knowledge because
“knowledge . . . is not an element of fraud that must be pled with particularity.”44
Plaintiff argues that, because knowledge and states of mind may be “averred
generally,” his complaint is adequately pled.45 Thus, as Plaintiff argues, because
Defendant misrepresented its own activity, it can be inferred that it was knowable
and that Defendant was in a position to know it.46
Third, Plaintiff also argues that, because intent or scienter is a state of mind,
it too may be averred generally.47 Plaintiff s argument is essentially that he may
allege facts that give an inference of fraudulent intent by alleging facts that are
“strong circumstantial evidence of conscious misbehavior or recklessness.”48
Fourth, Plaintiff contends that he justifiably relied on Defendant’s false
statements by purchasing Defendant’s securities under the “reasonable investor”
standard in Hubbarcl v. Hibbarcl Brown.49 Plaintiff argues that a reasonable investor
would have considered Sheffield’s comments material.5°
Fifth, Plaintiff argues that at this 12(b)(6) stage, it is sufficient that the
complaint alleges wrongful behavior that caused plaintiff “financial harm in the
amount stated.”51 Plaintiff asserts that damages need not be pled with particularity.52
Plaintiff argues that he need not identify the nature of his investment at this juncture
because he has adequately pled that he suffered “financial loss”53 which he contends
is sufficient for this pleading stage.54 Plaintiff alleges that the further damage
determination is a question of fact to be determined at trial.55
44 Id. at 29 (quoting LV1 Grp. lnvs., LLC, 2017 Dei. Ch. LExis 49, at *3).
45 Ia'. (quoting ABRYParmers V, L.P. v. F&WAcqul'sl`tl`on LLC, 891 A.2d 1032, 1050 (Del. Ch.
2006)).
46 Id. at 31.
47 Ia’. at 32.
48 Id. at 35-36 (quoting Chill v. GE, 101 F.3d 263, 267 (2d Cir. 1996)).
49 Id. at 41 (quoting 633 A.2d 345 (1993)).
50 Ia’. at 43.
51 Ia’. at 45 (quoting Anglo Am. Sec. Funa’, L.P. v. S.R. Glob. Int'l Funa’, L.P., 829 A.2d 143, 157
(Del. Ch. 2003).
521a1
53 Compl. 1111 1,64
54 Pl.’s Answ. Br. at 45.
55 Ia’. at 47.
Finally, and in the alternative, Plaintiff asserts that if this Court should find
his complaint deficient at this stage requiring dismissal of the complaint, such
dismissal should be without prejudice with leave to amend.56
IV. STANDARD OF REVIEW
Upon a motion to dismiss under Superior Court Rule 12(b)(6), the Court “(i)
accepts all well-pleaded factual allegations as true, (ii) accepts even vague
allegations as well-pleaded if they give the opposing party notice of the claim, (iii)
draws all reasonable inferences in favor of the non-moving party, and (iv) only
dismisses a case where the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances.”57 However, the Court will “ignore
conclusory allegations that lack specific supporting factual allegations.”58
Delaware Superior Court Civil Rule 9(b) is a heightened pleading standard
requiring that “[i]n all averments of fraud, negligence or mistake, the circumstances
constituting fraud, negligence or mistake shall be stated with particularity.”59
However, “[m]alice, intent, knowledge, and other condition of mind of a person may
be averred generally.”60 Although “‘knowledge . . . may be averred generally,’ where
pleading a claim of fraud has at its core the charge that the defendant knew
something, there must, at least, be sufficient well-pled facts from which it can
reasonably be inferred that this ‘something’ was knowable and that the defendant
was in a position to know it.”61 “The factual circumstances that must be stated with
particularity refer to the time, place, and contents of the false representations; the
facts misrepresented; the identity of the person(s) making the misrepresentation; and
what that person(s) gained from making the misrepresentation."62
56 Pl.’s Answ. Br. at 49; Tr. of Oral Arg. at 58-59.
57 wafNation, Inc. v. UBUSports, Inc., 2017 WL 4535970, at *5 (Del. Super. Ct. Oct. 11, 2017)
(citing Cenlral Mortg. C0. v. Morgan Stanley Mortg. Capl'tal Hola'ings LLC, 227 A.3d 531, 536
(Del. 2011)).
58 Ia’. (quoting Ramtmno v. Crawley, 705 A.2d 1029, 1034 (Del. 1998)).
59 TrueBlue, Inc. v. Leea’s Equl`l‘y Partners 1 V, LP, 2015 WL 5968726, at *6 (Del. Super. Ct. Sept.
25, 2015) (quoting Del. Super. Ct. Civ. R. 9(b)).
60 Ia’.
61 TrenwickAm. Ll'tl`g. Tr. v. Ernst & Young, L.L.P., 906 A.2d 168, 207-08 (Del. Ch. 2006), affd
sub nom Trenwl`ck/lm. Ll`tig. Tr. v. Billett, 931 A.2d 438 (Del. 2007).
62 Id
V. DISCUSSION
Plaintiff’s claim must be dismissed because it fails to plead with particularity
a claim of common law fraud. Even while accepting all well-pleaded facts as true,
and while drawing all reasonable inferences in favor of Plaintiff, his complaint fails
in some respects to meet the heightened pleading standard of Del. Super. Ct. R. Civ.
R. 9(b). The complaint has deficiencies in each element of common law fraud;
however, in the Court’s view, the most significant deficiency of the claim is
Plaintiffs nondisclosure of the nature of his investment63
A. Plaintijj‘Fal'ls to Aa’equately Pleaa’ a Claimfor Common Law Fraucl.
In order to survive a motion to dismiss a common law fraud claim, Plaintiffs
must allege:
1) a false representation, usually one of fact, made by the defendant; 2) the
defendant's knowledge or belief that the representation was false, or was made with
reckless indifference to the truth; 3) an intent to induce the plaintiff to act or to
refrain from acting; 4) the plaintiffs action or inaction taken in justifiable reliance
upon the representation; and 5) damage to the plaintiff as a result of such reliance.64
Plaintiff’ s complaint lacks particularity in each of these five elements.
1. Plaintiff has not adequately alleged false statements
Plaintiff contends that Defendant and Sheffield misrepresented its strength
and financial health on multiple occasions, specifically alleging that statements
regarding Defendant’s forthcoming strategies were “fraudulent
misrepresentations.”65 Plaintiff relies on Sheffield’s various statements related to
Defendant’s plans, strategies, and performance to make the argument that because
these disclosures, however optimistic they were, did not play out precisely as
intended, Defendant made false statements.66
65 See Part V.A.5 infra
64 TrueBlue, Inc., 2015 WL 5968726, at *6 (quoting Ga)j‘in v. Telea'yne, Inc., 611 A.2d 467, 472
(Dei.1992)).
65 Compl. 1111 49-51.
66 ]a’. 11 50 (“[Defendant] elected to convert most of [its] 2015 oil derivatives from three-way collars
to fixed price swaps to establish a firm oil price floor and lock in corresponding cash f`low.”); Ia'.
11 53 (“we are preserving our strong cash position and balance sheet by reducing drilling activity”);
Delaware courts have often held that “[e]xpressing opinions or predictions
about the future, however, ‘cannot give rise to actionable common law fraud.”’67 “ln
that regard, the misrepresentation forming the basis for the fraud or negligent
misrepresentation claim must be material, and the plaintiff generally cannot rely, for
example, on puffery, expressions of mere opinion, or representations that are
obviously false.”68 Courts have often disregarded forward-looking “puffery” due to
the inherent “vagueness and resultant immateriality” of the statement.69
Plaintiffs assertion that Defendant and Sheffield’s statements were anything
more than opinions or forecasts is not viable. The language in the statements, and
the disclaimers accompanying them,70 appear to be merely opinions of Defendant’s
performance and forward-looking predictions related to newly-implemented
business strategies. Delaware courts are not inclined to allow these types of
statements to form the basis of a cognizable common law fraud claim,71 Thus, given
the optimistic, predictive nature of Defendant’s statements, Plaintiff has failed to
adequately identify any false statements
2. Plaintiff has failed to adequately allege knowledge
Plaintiff has not adequately pled knowledge in his complaint because he fails
to plead facts that Defendant knew of the statements’ falsity. Plaintiff makes the
claim that, because knowledge may be “averred generally,”_that is, without
particularity_it is inferable that Defendant knew the details of its financial
strategies and thus, the truth of their performance.72
Ia'. ll 56 (“[Defendant] has successfully implemented its high-grade horizontal drilling program
and continues to deliver strong well results”).
67 BAE Sys. N. Am. Inc. v. Lockheed Martin Corp., 2004 WL 1739522, at *7 (Del. Ch. Aug. 3,
2004) (quoting Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544, 554 (Del. Ch. 2001)).
66 Vichz` v. Koninklijke Philips Elecs., N. V., 85 A.3d 725, 775 (Del. Ch. 2014).
69 In re Burlington Coat Factory Sec. Li`tig., 114 F.3d 1410, 1428 (3d Cir. 1997); see also Def.’s
Op. Br. in Support of its Mot. to Dismiss at 17.
76 Def.’s Op. Br. in Support of its Mot. to Dismiss at 19-20.
71 In re Oracle Corp., 867 A.2d 904, 935 (Del. Ch. 2004), a}j"d sub nom In re Oracle Corp.
Derl`vatl've Litz'g., 872 A.2d 960 (Del. 2005) (holding “[b]ecause, by their very nature, predictions
of the future are less certain than statements about past events, courts have been less apt to find
forward-looking statements material and have been more dubious of claims that it was reasonable
for investors to rely upon such statements in making trading decisions.”); see also Trenwick Am.
Ll`tl'g. Tr., 906 A.2d at 209 (holding that a plaintiff’s fraud claim based on a company’s statement
that it was optimistic about future performance is the “softest of turf’ on which a claim may be
grounded).
72 Pl.’s Answ. Br. at 29.
10
However, “[w]hile [9(b)] permits ‘intent, knowledge and other condition of
mind of a person’ to be averred generally, ‘ [t]o say “Defendant knew or should have
known’ is not adequate.”73 A common law fraud claim requires “the defendant's
knowledge or belief that the representation was false, or was made with reckless
indifference to the truth.”74
Plaintiff makes mere conclusory statements that because the hedging strategy
of Defendant was its own, Defendant must have known things about it and
Defendant was, in fact, in a position to know things about it.75 Plaintiff contends that
“[t]he gravamen of Plaintiff’s allegations against Defendant is that Defendant
misrepresented its own hedge program1 cash flows and asset values. lt is irrefutable
that the creator of its hedging strategy knew the true and exact details of its
program.”76 What Plaintiff fails to adequately allege is whether Defendant knew of
the statements’ falsity, as required to make out a claim for fraud.
Plaintiff attempts to analogize Metro Comme'n Corp. BVI v. Advanced
Mobilecomm Techs. Inc. by stating that because the Court of Chancery inferred
knowledge “because the defendants allegedly failed to disclose the misconduct of
which they were aware.”77 Yet, Plaintiff does not point to similar or any particular
“misconduct” on the part of Defendant in this case. Plaintiff s argument circles back
to the idea that because the financial strategies were Defendant’s own, then
Defendant must have known everything about them, including any alleged falsity.
This argument fails to establish that Defendant knew of its statements’ falsity. Thus,
knowledge is inadequately pled here.
75 Metro Commc'n Corp. BVI v. Advanced Mobtlecomm Techs. Inc., 854 A.2d 121, 144 (Del. Ch.
2004) (quoting Twin Coach Co. v. Chance VoughtAircraft, Inc., 52 Del. 588, 598, 163 A.2d 278,
284 (Del. Super. Ct. 1960)) (holding that the court must “disregard conclusory allegations
unsubstantiated by specific factual details that would support a rational inference that a particular
defendant committed common law fraud.”).
74 TrueBlue, Inc., 2015 WL 5968726, at *6 (quoting Gajj‘in, 611 A.2d at 472).
75 Pl.’s Answ. Br. at 31 (quoting Iotex Commc'ns, Inc. v. Defries, No. 15817, 1998 WL 914265, at
*4 (Del. Ch. Dec. 21, 1998))
While recognizing that Court of Chancery Rule 9(b) provides that “knowledge may be averred
generally,” where pleading a claim of fraud or breach of fiduciary duty that has at its core the charge
that the defendant knew something, there must, at least, be sufficient well-pleaded facts from which
it can reasonably be inferred that this “something” was knowable and that the defendant was in a
position to know it.
76 Pl.’s Answ. Br. at 29.
77 Id. at 31 (citing 854 A.2d at 145).
ll
3. Plaintiff has failed to adequatelv allege intent or scienter.
Plaintiff s argument that intent “may be averred generally” fares no better than
his argument of the same as it applied to “knowledge.”
A plaintiff can adequately plead the element of intent or scienter for common
law fraud by “establishing a motive and an opportunity to commit fraud, or by setting
forth facts that constitute circumstantial evidence of either reckless or conscious
behavior[.]”78
Plaintiff argues that Defendant had the necessary intent to commit fraud
because it made statements after stock offerings, which were, he asserts, intended to
induce investment.79 However, Delaware courts have held that they “will not infer
fraudulent intent from the mere fact that some officers sold stock.”80 F ederal courts
have also held that intent may not be pled merely because corporate officers sold
stock.6l
Plaintiff also argues that, because intent may be averred generally, he may
allege “strong circumstantial evidence of conscious misbehavior or recklessness.”82
Plaintiff’ s argument is essentially that intent may be inferred because Defendant
allegedly made false statements.63 While the Court recognizes that the particularity
requirement is lessened for pleading a state of mind such as intent, it cannot accept
Plaintiffs reasoning on this point. Plaintiff cites to numerous cases to reiterate that
intent may be averred generally in order to bypass the particularity requirement of
Rule 9(b).64 However, Plaintiff does not adequately plead “circumstantial evidence
of conscious misbehavior,” let alone “strong circumstantial evidence” of the same.
76 Deloitte LLP v. Flanagan, 2009 WL 5200657, at *8 (Del. Ch. Dec. 29, 2009) (quoting Wel`ner
v. Quaker Oats Co., 129 F.3d 310, 318 n.8 (3d Cir. 1997)).
79 Pl.’s Answ. Br. at 32.
66 Deloitte LLP, 2009 WL 5200657 at *8 n.86.
61 GSC Partners CDO Fund v. Washington, 368 F.3d 228, 237 (3d Cir. 2004) (holding that “[i]n
every corporate transaction, the corporation and its officers have a desire to complete the
transaction, and officers will usually reap financial benefits from a successful transaction Such
allegations alone cannot give rise to a ‘strong inference’ of fraudulent intent.”).
62 Pl.’s Answ. Br. at 35-36 (quoting Chill, 101 F.3d at 267).
63 ]d at 36 (stating “[t]he complaint alleges that, concurrent with its fraudulent misrepresentations,
Defendant had knowledge of facts contradicting its misrepresentations . . . Finally, the amended
complaint identifies specific circumstances indicating conscious behavior by Defendant giving rise
to a strong inference of scienter.”).
64 Id. at 37-39.
12
With the exception of his claim that Defendant made stock offerings in three
consecutive years,65 Defendant points to no evidence, circumstantial or direct, from
which intent may be inferred.
The Court of Chancery stated in Trenwt'ck Am. Litz`g. Tr. v. Ernst & Young,
L.L.P. that “backwards-looking arguments” that fraud must have occurred because
a plaintiff suffered damages will be rej ected.66 This Court recognizes the somewhat
lenient pleading standard when it comes to making a claim about a person’s state of
mind. However, this Court will not allow that less stringent pleading standard to
subvert the requirement that a plaintiff must still plead specific facts that lead to an
inference of fraudulent intent.67 Plaintiff has not done so here.
4. Plaintiff has not alleged adequate justifiable reliance
Plaintiff has not pled with particularity that he justifiably relied on
Defendant’s alleged misrepresentations because he fails to plead with particularity
just how he so relied. Reliance on a corporate disclosure is viewed in terms of its
materiality. A fact is material if “if there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to [act][.]”66
Plaintiff argues that, at this early stage, dismissal is not warranted on the
grounds that the alleged misrepresentations are not material.69 However, what
Plaintiff fails to adequately assert is how his investments were affected by
Defendant’s statements. He repeatedly alleges that he relied, but does not adequately
allege how he relied. “[C]onclusory allegation[s] that [p]laintiffs were in fact
deceived by the acts, omissions and conduct described in this complaint and relied
thereon to their detriment is glaringly insufficient to meet the particularity
requirement of Rule 9(b).”96
65 Id. at 33 (“Defendant engaged in significant public offerings every gear from 2014 to 2016.”).
66 906 A.2d at 209 (Del. Ch. 2006).
87 Id
This does not require a plaintiffto probe the mindset of the defendants, what it does require is that
the plaintiff set forth particularized facts regarding the precise estimates in question, the
circumstances suggesting they were unsound from the inception, and why the defendants had an
incentive to intentionally low-ball them.
66 Hubbard, 633 A.2d at 352 n.8 (quoting TSC Indus., lnc. v. Northway, Inc., 426 U.S. 438, 449,
96 S. Ct. 2126, 2132, 48 L. Ed. 2d 757 (1976)).
69 Pl.’s Answ. Br. at 42.
90 Anglo Am. Sec. Fund, L.P., 829 A.2d at 159 (Del. Ch. 2003) (internal quotation marks omitted).
13
Although Plaintiff argues that he pled “the exact statements and
representations upon which he relied,” 91 without knowledge of the nature of his
investments, reliance is conclusory and not pled with particularity.
5. Plaintiff has failed to adequately plead damages.
Plaintiff’s argument that merely pleading that he suffered “financial loss” is
adequate at this stage is unavailing. “Pursuant to Superior Court Civil Rule 9(b),
allegations of fraud must be plead with particularity. This includes the fifth element
of the claim-causal damages.”92
“In order to survive a motion to dismiss a fraud claim, plaintiff must allege
damages.”93 “‘Delaware courts have consistently held that to successfully plead a
fraud claim, the allegedly defrauded plaintiff must have sustained damages as a
result of a defendant's actions,’ and those damages must be based on identifiable
facts.”94 “When a plaintiff fails to allege legally cognizable damages suffered as a
result of reliance on any false representation, the claim must be dismissed.”95
Delaware law does not entertain speculative damage recovery.96
Plaintiff fails to allege legally cognizable damages. Rather he makes
conclusory allegations of “significant financial loss.”97 With the exception of
mentioning that his damages exceed “$15,000,” Plaintiff fails to allege identifiable
facts on which damages may be pled.96
Plaintiff cites Anglo Am. Sec. Fund, L.P. v. S.R. Glob. Int'l Fund, L.P. for the
proposition that “it is enough that the complaint alleges that this
behavior was wrongful and caused the plaintiffs financial harm in the amount
91 Pl.’s Answ. Br. at 44.
92 Cornell Glasgow, LLC v. La Grange Properties, LLC, 2012 WL 2106945, at *8 (Del. Super. Ct.
June 6, 2012) (footnote omitted).
93 Abbott Labs. v. Owens, 2014 WL 8407613, at *11 (Del. Super. Ct. Sept. 15, 2014).
94 Brevet Capital Specz`al Opportuni`ties Fund, LP v. Fourth Third, LLC, 2011 WL 3452821, at *8
(Del. Super. Ct. Aug. 5, 2011) (quoting Dalton v. Ford Motor Co., 2002 WL 338081, at *6 (Del.
super. Ct. Feb. 28, 2002)).
95 Abbor¢ Labs., 2014 wL 8407613, ar *12(ciring Manzo v. Rire Aid Corp., 2002 WL 31926606,
at *5 (Del. Ch. Dec. 19, 2002), ajj"d, 825 A.2d 239 (Del. 2003)) (internal brackets omitted).
96 Id. at *11 (citing Nucar Consulting, Inc. v. Doyle, at * 12 (Del. Ch. Apr. 5, 2005), a)Y'd, 913 A.2d
569(De1. 2006)).
97 Compl. 11 64.
98 1a 11 4.
14
stated.”99 However, his quotation from Anglo Am. Sec. Fund, L.P. here is taken out
of context. In Anglo Am. Sec. Fund, L.P. , the Court of Chancery found that when the
defendant “impermissibly withdrew over $22 million” of funds from the capital
account, which exceeded the available balance, “and then wrongfully failed to
disclose the fact, amount, or implications of the withdrawal in the [audited financial
statement][,]” he caused financial harm to his other partners.100 The Court of
Chancery found that because the above facts were alleged in the complaint, the issue
of damages could be inferred based on the complaint.10l However, Plaintiff
incorrectly utilizes this quotation to argue that, at the pleadings stage, it is sufficient
to allege in a conclusory manner that he suffered financial injury. This is not the
case.
Moreover, because Plaintiff has not identified the type of investment he made
in defendant’s securities, the amount of that investment, or how the investment
relates to Defendant’s alleged misrepresentations he cannot adequately plead that
he suffered a pecuniary loss as a result of those alleged misrepresentations “Without
such basic information about what he actually did based on Pioneer’s statements,
Plaintiff has not alleged particularized facts supporting justifiable reliance.”102
Plaintiff has failed to adequately plead common law fraud because his
complaint fails to “clearly place[] the defendant on notice not vaguely or generally
but of the precise misconduct with which they are charged.”103 A complaint is
sufficient when a plaintiff “inform[s] the defendant of the precise transactions at
issue, and the fraud alleged to have occurred in those transaction[.]”104 Here, Plaintiff
has declined to reveal the nature of his investment, contending “there's nothing in
the law that says that an individual fraud plaintiff has to lay bare his transactions at
the pleading stage.”105
99 Pl.’s Answ. Br. at 45 (quoting 829 A.2d 143, 157 (Del. Ch. 2003)).
100 Anglo Am. Sec. Fund, L.P., 829 A.2d at 156-57.
101Id. at 157.
102 Def.’s Reply Br. in Support of its Mot. to Dismiss at 21 (citing Anglo Am. Sec. Fund, L.P., 829
A.2d at 159) (emphasis omitted).
103 Pl.’s Answ. Br. at 19 (quoting Kahn Bros. & Co. Pro/z`t Sharz'ng Plan & Tr. v. Fischbach Corp.,
1989 WL 109406, at *5 (Del. Ch. Sept. 19, 1989)).
104 Id. (quoting Vz'etnam Veterans of Am., Inc. v. Guerdon Indus., Inc., 644 F. Supp. 951, 959 (D.
Del. 1986)) (holding that “Plaintiffs have set forth their allegations of fraud with sufficient
particularity to meet [the Rule 9(b)] standard.”).
105 Tr. of Oral Arg. at 55; see id. (PLAINTIFF: “l haven't found any case law that says a securities
plaintiff in an individual fraud action has to spell out exactly how it traded in its pleadings.”). But
see Pl.’s Answ. Br. at 19 (quoting Vietnam Veterans of Am., Inc., 644 F. Supp. at 959 for the
opposite of his contention at oral argument, that is, “[b]y informing defendants of the precise
15
Without knowing what type of investment he executed, Plaintiff cannot
adequately plead with particularity that he justifiably relied on Defendant’s alleged
misrepresentations or the extent of his damages thereof.106 The requisite causal link
between reliance and damages cannot be bridged without an understanding of how
Plaintiff’ s investment position was affected by Defendant’s statements ln this case,
Plaintiff in fact needed to “lay bare his transactions at the pleading stage.”107
For example, in Anglo Am. Sec. Funa’, L.P., the Court of Chancery found that
a plaintiffs’ allegation that they “suffered damages in excess of $9.5 million” was an
adequate pleading under the Rule 9(b) particularity standard.106 However, the court
also held that what was missing from the complaint were facts that tend to link this
pecuniary injury to the alleged fraud.109
What is missing, however, are particular facts from which the Court and the
defendants can understand how the alleged fraud caused this injury. Since the
plaintiffs' reliance on the alleged misrepresentation is averred nonspecifically, it is
unsurprising that the next logical step linking reliance to the resulting injury is
similarly glossed over in the complaint. lt is not enough for the plaintiffs to
complain that the defendants knowingly failed to disclose an important matter and
then jump directly to the observation that the plaintiffs believe that collectively
they are now $9.5 million dollars short in their assets The fifth element of fraud is
not pled with adequate particularity.110
The plaintiffs in Anglo Am. Sec. Fund, L.P. were able to, at a minimum, allege a
specific dollar amount, whereas Plaintiff has merely assured the Court that he
transactions at issue, and the fraud alleged to have occurred in those transactions, the Amended
Complaint is clearly sufficient . . . to place the defendants on notice of the precise misconduct with
which they are charged.”) (internal quotation marks omitted).
106 See Tr. of Oral Arg. at 4
DEFENDANT’S COUNSEL: This pleading failure is critical because the nature of plaintiffs
investment may well define or limit the scope of any claims that he may assert. Just by way of
example, if plaintiffs investment was in bonds or some type of derivative security, investments that
are purely contractual in nature, the terms of the governing contract might well limit the type of
claim he's trying to assert here. But we don't know, and the Court doesn't know because 1\/1r. Mooney
chose not to disclose those critical details
107 See id. at 55.
'08 Anglo Am. sea Fund, L.P., 829 A.2d at 159.
1091a'
110 101
16
“suffered significant financial loss”1 11 and the damages are “in excess of $ l 5,000.”l 12
Plaintiff has “glossed over” the nature of the “resulting injury” in a manner
somewhat akin to the plaintiffs in Anglo Arn. Sec. Funa’, L.P. 113
Plaintiff s vague allegation of fraud is inadequately pled without identification
of the type of investment he made in Defendant’s securities Even under the onerous
burden on the Defendant on a 12(b)(6) motion to dismiss, with all reasonable
inferences in favor of Plaintiff, the complaint still fails to reach the level of
particularity commensurate with Delaware Superior Court Civil Rule 9(b).
Plaintiffs fraud claim must be dismissed because the Court finds that the justifiable
reliance and damages elements cannot be adequately pled without an allegation of
the nature of Plaintiff" s investments Even assuming arguendo that this Court, taking
all reasonable inferences in favor of Plaintiff and accepting all well-pleaded factual
allegations as true, accepted the possibility that Defendant did make false statements,
knowing they were false, with the intent to induce investment, it is impossible to
ascertain how Plaintiff could have possibly relied on them and suffered damage
without knowing what action he took. Otherwise, Plaintiff’ s argument is a mere
conclusory allegation that, as a shareholder, he is entitled to recovery because
Defendant’s stock did not perform well. This cannot survive a motion to dismiss
VI. CONCLUSION
Therefore, as a result of the deficiencies in his complaint, Plaintiff has not
pled with particularity the elements of a claim for common law fraud. Without more,
his complaint cannot survive a 12(b)(6) motion to dismiss
However, in both his Answering Brief and at oral argument, Plaintiff
requested that, if the Court should grant Defendant’s motion to dismiss, it do so
“without prejudice with leave to amend” the complaint.114 This Court grants Plaintiff
leave to amend the complaint within 45 days of this opinion.115
111 Compl.11 64.
112 Id. 11 4.
113 Anglo Am. Sec. Fund, L.P., 829 A.2d at 159.
114 Pl.’s Answ. Br. at 49; Tr. of Oral Arg. at 58-59.
115 Parker v. State, 2003 WL 24011961, at *6 (Del. Super. Ct. Oct. 14, 2003) (holding that
“[Delaware Superior Court Civil Rule 15] provides that leave to amend a complaint shall be freely
given when justice so requires”).
17
Defendant’s motion to dismiss is GRANTED, WITH LEAVE FOR
PLAINTIFF TO AMEND THE COMPLAINT.
W\M¢¢»L
Richard R. Cooch, R.J.
cc: Prothonotary
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