Frfgtr Pension & Relief Fund v. T. Bulmahn , 854 F.3d 741 ( 2017 )

Case: 15-31094 Document: 00513963156 Page: 1 Date Filed: 04/21/2017
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 15-31094 April 21, 2017
Lyle W. Cayce
BRIAN M. NEIMAN; WILLIAM KRUSE; and THE MOSHE ISSAC Clerk
FOUNDATION, Individually and on behalf of all others similarly situated,
Plaintiffs - Appellants
v.
T. PAUL BULMAHN; ALBERT L. REESE, JR.; KEITH R. GODWIN;
LELAND E. TATE,
Defendants - Appellees
Appeal from the United States District Court
for the Eastern District of Louisiana
Before HIGGINBOTHAM, ELROD, and HIGGINSON, Circuit Judges.
STEPHEN A. HIGGINSON, Circuit Judge:
This securities class action concerns ATP Oil & Gas Corporation’s
(“ATP”) collapse into bankruptcy. Plaintiffs-Appellants were shareholders of
ATP, a company engaged in the acquisition, development, and production of oil
and gas properties. Plaintiffs allege that Defendants, each of whom was an
officer or director of ATP, misrepresented (1) the production of Well 941 #4
(“Well #4”) (a new well that ATP brought online in 2011), (2) ATP’s liquidity
and whether the company had the available funds to complete the Clipper
pipeline (a pipeline project that ATP anticipated completing in late 2012), and
(3) the true reason that Matt McCarroll resigned as CEO of ATP. The district
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court dismissed Plaintiffs’ Second Amended Complaint with prejudice.
Plaintiffs appealed. We AFFIRM.
I
A. ATP
ATP was a Texas company that developed oil and gas properties. As of
March 2010, ATP had an interest in 104 wells in the Gulf of Mexico.
Defendants were each officers of ATP. Defendant T. Paul Bulmahn served as
Chairman, Chief Executive Officer, and director of ATP from May 2008
through the bankruptcy. Defendant Albert L. Reese, Jr., served as CFO of ATP
from March 1999 through the bankruptcy. Defendant Keith R. Godwin served
as ATP’s Chief Accounting Officer from April 2004 through the bankruptcy.
Defendant Leland E. Tate served as President of ATP from May 2008 through
the bankruptcy.
B. Well #4
In August 2011, ATP began production from Well #4. ATP stated that
“[t]he well delivered on ATP’s original expectations with an initial rate
exceeding 7,000 Boe [barrels of oil equivalent] per day . . . . Company-wide
production now exceeds 31,000 Boe per day.”
On September 12, 2011, Reese re-stated that ATP projected its total
production at 31,000 Boe per day. On September 26, 2011, Moody’s Investors
Service issued a report, which claimed that ATP’s cash flow was “not sufficient
to cover” ATP’s outstanding notes. Reese responded to the Moody’s article on
September 29, 2011, stating, “I can’t fight rumors or reports, all I can do is
continue to deliver on the promises we’ve made. Our expectation is that
everything is going to be fine.”
Plaintiffs claim that both of Reese’s statements were false and
misleading because Well #4 actually was producing far less than the projected
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7,000 Boe per day. In November 2011, ATP disclosed that Well #4 actually
was producing 3,500 Boe per day.
C. ATP’s Liquidity and Financial Condition
Plaintiffs raise a number of allegations concerning Defendants’
representations that ATP’s liquidity and financial condition were solid from
2010 to 2012. Throughout the period, Defendants routinely stated that ATP
had sufficient liquidity to meet its capital needs. Plaintiffs allege that each of
these statements was false or misleading, arguing that in fact from 2010 to
2012, ATP’s financial condition was worsening and its liquidity position was
crumbling. In support, Plaintiffs first point to Reese’s testimony at ATP’s
bankruptcy hearing where Reese testified that ATP was “facing a severe
liquidity crisis[.]” Second, Plaintiffs argue that ATP’s reliance on financing
signaled its imminent liquidity crisis. Namely, Plaintiffs allege that beginning
in April 2010, ATP was forced to sell a significant portion of future production
from its wells (in the form of overriding royalty interests (“ORRIs”) and net
profit interests (“NPIs”)—financial instruments that sell a percentage of future
income from an asset) to finance drilling projects. In support, Plaintiffs cite
Confidential Witness Three (“CW3”), a certified public accountant who worked
in ATP’s accounting and finance department from June 2010 to October 2011,
and who observed that “even if [ATP’s wells] produced like gangbusters, they
don’t have a right to that money—their cash flows are already spoken for.”
Third, Confidential Witness Four (“CW4”), the Vice President of Production at
ATP from June 2001 until October 2013, additionally noted that during the
class period, ATP often delayed maintenance work and payments to vendors
in order to manage cash flow. Indeed, by May 2012, ATP’s cash position
became so strained that it withheld approximately $23.2 million in ORRI and
NPI payments in order to stave off bankruptcy.
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D. The Clipper Project
Up until its bankruptcy, ATP was developing the Clipper wells in the
Gulf of Mexico. ATP believed that the Clipper wells held plentiful reserves.
However, to monetize those reserves ATP needed to build a pipeline connecting
the Clipper wells to the nearest oil production platform. The total cost of
completing the Clipper pipeline was estimated at between $140 million and
$150 million. ATP’s management believed that the revenue from the Clipper
wells would alleviate ATP’s poor financial condition. ATP’s management
routinely touted the Clipper project’s potential revenue. Plaintiffs allege that
each of these statements was false and misleading because ATP did not have
the available capital or access to capital necessary to complete the Clipper
pipeline.
E. Matt McCarroll’s Resignation
On June 1, 2012, ATP issued a press release announcing that Matt
McCarroll had been hired as CEO, replacing Defendant Bulmahn. Six days
later, on June 7, 2012, ATP issued a second press release announcing that ATP
“was unable to reach a mutually agreeable employment agreement with Mr.
McCarroll and effective today he has submitted his resignation.” Defendants
Bulmahn and Reese were listed as individuals to contact on both press
releases.
Plaintiffs contend that the reason given for McCarroll’s resignation was
false or misleading. According to Plaintiffs, the true reason for McCarroll’s
departure was that McCarroll discovered ATP’s financial weaknesses and
wanted to begin restructuring immediately, but the ATP Board would not
agree.
II
“We review de novo the district court’s dismissal of the securities fraud
complaint . . . .” Plotkin v. IP Axess Inc., 407 F.3d 690, 696 (5th Cir. 2005). “A
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plaintiff’s complaint will survive a Rule 12(b)(6) motion to dismiss if, accepting
its factual allegations as true, the complaint plausibly states a claim for relief.”
Local 731 I.B. of T. Excavators & Pavers Pension Trust Fund v. Diodes, Inc.,
810 F.3d 951, 956 (5th Cir. 2016) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009)). “Where, as here, the complaint involves an allegation of fraud, Federal
Rule of Civil Procedure 9(b) imposes a higher standard on the complainant,
requiring that he plead with ‘particularity the circumstances constituting
fraud.’” Id. “The PSLRA has raised the pleading bar even higher and enhances
Rule 9(b)’s particularity requirement for pleading fraud in two ways.” Id.
(citing Ind. Elec. Workers’ Pension Trust Fund IBEW v. Shaw Grp., Inc., 537
F.3d 527, 533 (5th Cir. 2008)). “First the plaintiff must ‘specify each statement
alleged to have been misleading, and the reason or reasons why the statement
is misleading.’” Id. (citing Shaw Grp., 537 F.3d at 533). “Second, ‘for each act
or omission alleged to be false or misleading, plaintiffs must state with
particularity facts giving rise to a strong inference that the defendant acted
with the requisite state of mind.’” Id. (quoting Shaw Grp., 537 F.3d at 533).
Plaintiffs assert two claims. Count One alleges that Defendants violated
Section 10(b) of the Exchange Act and Rule 10b–5 promulgated thereunder.
Count Two alleges that Defendants are liable as control persons under Section
20(a) of the Exchange Act.
To state a claim under Rule 10b–5 “a plaintiff must allege, in connection
with the purchase or sale of securities, ‘(1) a misstatement or an omission (2)
of material fact (3) made with scienter (4) on which the plaintiff relied (5) that
proximately caused [the plaintiff’s] injury.’” Nathenson v. Zonagen Inc., 267
F.3d 400, 406–07 (5th Cir. 2001) (quoting Tuchman v. DSC Commc’ns Corp.,
14 F.3d 1061, 1067 (5th Cir. 1994)); see also Goldstein v. MCI WorldCom, 340
F.3d 238, 244 (5th Cir. 2003).
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[A] plaintiff pleading a false or misleading statement
or omission as the basis for a section 10(b) and Rule
10b–5 securities fraud claim must, to avoid dismissal
pursuant to Rule 9(b) and 15 U.S.C. §§ 78u–4(b)(1) &
78u–4(b)(3)(A) [the PSLRA]: (1) specify . . . each
statement alleged to have been misleading, i.e.,
contended to be fraudulent; (2) identify the speaker;
(3) state when and where the statement was made; (4)
plead with particularity the contents of the false
representations; (5) plead with particularity what the
person making the misrepresentation obtained
thereby; and (6) explain the reason or reasons why the
statement is misleading, i.e., why the statement is
fraudulent.
Goldstein, 340 F.3d at 245 (quoting ABC Arbitrage Plaintiffs Grp. v. Tchuruk,
291 F.3d 336, 350 (5th Cir. 2002)).
“Under Section 20(a), a person who exerts control over a person who
violates any provision of the Securities Exchange Act can be held jointly and
severally liable with the primary actor of the underlying securities law
violation.” Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp.,
565 F.3d 200, 206 n.4 (5th Cir. 2009). Nonetheless, “[c]ontrol person liability
is secondary only and cannot exist in the absence of a primary violation.”
Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353, 383 (5th Cir.
2004) (citing Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1021 n.8 (5th
Cir. 1996)).
III
A. Reese’s Statements
Broadly, Plaintiffs’ scienter theory with respect to Reese’s statements
about Well #4’s production is that prior to speaking on September 12 or
September 29, Reese knew, or was severely reckless in not knowing, that Well
#4’s production had dropped. Plaintiffs ground this theory in three sources: (1)
Reese’s purported motive to deceive investors, (2) allegations made by certain
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confidential witnesses, and (3) Reese’s high rank in the company. The district
court rejected Plaintiffs’ scienter theory. We agree.
‘“Scienter’ is ‘a mental state embracing intent to deceive, manipulate, or
defraud[.]’” Goldstein, 340 F.3d at 245 (quoting Ernst & Ernst v. Hochfelder,
425 U.S. 185, 193 n.12 (1976)). “[P]laintiffs can demonstrate scienter by a
showing of ‘severe recklessness’ . . . .” Id.
[Severe recklessness] is limited to those highly
unreasonable omissions or misrepresentations that
involve not merely simple or even inexcusable
negligence, but an extreme departure from the
standards of ordinary care, and that present a danger
of misleading buyers or sellers which is either known
to the defendant or is so obvious that the defendant
must have been aware of it.
Spitzberg v. Hous. Am. Energy Corp., 758 F.3d 676, 684 (5th Cir. 2014) (quoting
Rosenzweig v. Azurix Corp., 332 F.3d 854, 866 (5th Cir. 2003)).
“[W]e must look to the Complaint in toto in deciding whether it
adequately pleads scienter.” Barrie v. Intervoice-Brite, Inc., 397 F.3d 249, 263
(5th Cir. 2005), opinion modified on denial of reh’g, 409 F.3d 653 (5th Cir. 2005)
(citing Goldstein, 240 F.3d at 246–47). “A three-step framework guides this . . .
evaluation. First, the factual allegations in the pleadings must be accepted as
true. Second, the court must consider the entire complaint . . . . Third, the
court must consider plausible inferences supporting as well as opposing a
strong inference of scienter.” Diodes, 810 F.3d at 956–57 (internal citations
omitted). “Ultimately, in order to create an inference of scienter, the
allegations in the complaint must be ‘cogent and compelling,’ not simply
‘reasonable,’ or ‘permissible.’” Id. at 957 (quoting Tellabs, Inc. v. Makor Issues
& Rights, Ltd., 551 U.S. 308, 323 (2007)).
Plaintiffs’ scienter allegations fall short for three reasons. First,
Plaintiffs have failed adequately to plead that Reese had a motive to mislead
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the public in September 2011. The fact that ATP disclosed the true production
of Well #4 in November 2011, just two months after Reese’s statements, belies
an inference of scienter. On November 9, 2011, Tate stated
As we brought [Well #4] on production, what we saw
was a completion efficiency where there was more
wellbore drawdown near the well bore than what we
had seen during the well test and as a result we can
make on a routine basis about 3,500 barrels a day
equivalent out of that well.
It would have made little sense for Reese to lie about Well #4’s production in
September only for Tate to disclose the true production in November. This is
especially true because Plaintiffs have not alleged that Reese had a particular
reason to lie in September that would have vanished by November. For
example, Plaintiffs do not allege that Reese inflated ATP’s production numbers
in September in order to facilitate an important business opportunity that was
no longer salient in November. Instead, Plaintiffs allege that throughout Fall
2011, ATP’s fiscal position continually worsened.
Plaintiffs’ contrary suggestion that Reese had a motive to lie is not
supported by our case law. We have found that “[t]he desire to raise capital in
the normal course of business does not support a strong inference of scienter
because virtually all corporate insiders share this goal.” Owens v. Jastrow, 789
F.3d 529, 539 (5th Cir. 2015) (citing Abrams v. Baker Hughes Inc., 292 F.3d
424, 434 (5th Cir. 2002)). The “outlier” to this proposition is Goldstein where
this court found that the company’s “need to complete a ‘crucial’ $129 billion
merger . . . gave the company a motive to inflate its financial results.” Shaw
Grp., 537 F.3d at 544 (quoting Goldstein, 340 F.3d at 242, 250).
Plaintiffs do not explain with any specificity why, in September 2011,
when Reese spoke, ATP had a more than routine need to raise capital. For
example, Plaintiffs have not alleged that in September 2011, ATP was in
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critical negotiations to facilitate financing or to seek out potential creditors.
Rather, Plaintiffs’ allegations indicate that in September 2011, ATP could
easily access credit, and, indeed, did so many times.
Although lack of motive is not fatal to Plaintiffs’ claim, “[w]here, as here,
the plaintiff[s have] not alleged a clear motive for the alleged misstatements
or omissions, the strength of [the] circumstantial evidence of scienter must be
correspondingly greater.” See R2 Invs. LDC v. Phillips, 401 F.3d 638, 644 (5th
Cir. 2005).
Second, Plaintiffs’ Confidential Witness allegations fall short. All that
Plaintiffs’ Confidential Witness allegations indicate is that reports were made
available to Reese, which showed that Well #4 was not producing 7,000 Boe
per day. Plaintiffs have not directly alleged that Reese actually read the
reports or was otherwise made aware of the lower production. The allegation
that CW4 claims to have been confident that Reese knew of the production
numbers does not plausibly allege Reese’s knowledge because Plaintiffs fail to
plead any basis for CW4’s confidence. Thus, the critical question is whether it
is proper to infer that Reese was made aware, or was severely reckless in not
being aware, of Well #4’s lower production.
Our precedent indicates that for allegations concerning internal
corporate reports alone to support a strong inference of scienter (1) the
complaint must have “corroborating details regarding the contents of allegedly
contrary reports, their authors and recipients[,]” Abrams, 292 F.3d at 432, and
(2) the corporate reports be connected to the speaking executive in a persuasive
way, see Goldstein, 340 F.3d at 251–52.
Plaintiffs’ allegations fail on the second element. Plaintiffs allege that
Reese received weekly emails containing production reports. Plaintiffs do not
directly allege, however, that Reese read the relevant section of the reports
before he made either his September 12 or September 29 statements. Instead,
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Plaintiffs ask the court to infer that Reese either actually reviewed the
production reports, or was severely reckless in not doing so, from the fact that
he received them.
Goldstein comes the closest to defining when a plaintiff adequately
alleges that an executive has knowledge of a report. 340 F.3d 238. There, the
plaintiffs alleged that two executives, Ebbers and Sullivan, misstated
WorldCom’s financial position by failing to write off over $500 million of
uncollectable accounts receivable. Id. at 243–44. In support of their scienter
allegations, plaintiffs alleged that WorldCom’s legal department prepared a
monthly list of delinquent accounts. Id. at 251. Plaintiffs alleged that the list
should have alerted Ebbers and Sullivan to the need for a write off. Id. at 251–
52. That list was sent to certain financial officers including David Myers, the
company controller. Id. at 251. Plaintiffs alleged that Ebbers and Sullivan
must have become aware of the list, or were severely reckless in not doing so,
because Myers directly reported to Ebbers and Sullivan. Id. at 251–52. The
court rejected the argument, holding that the PSLRA did not allow “the
plaintiffs to make a conclusory assumption that simply because a monthly
report was generated and distributed to an individual who reported to Ebbers
and Sullivan, Ebbers or Sullivan had knowledge of certain delinquent account
information which may appear in monthly reports.” Id. at 252. Instead, the
court suggested that plaintiffs should have alleged, for example, that Myers
presented or discussed the report with Ebbers and Sullivan. Id.
The specifics of this case make the inference that Reese actually looked
at Well #4’s data tenuous. CW4 testified that each week ATP’s executives
would receive a productivity report listing both company-wide metrics and
individual well data. For Reese to determine that Well #4’s productivity had
fallen, he would have had to open not only the email from CW4’s staff
containing the productivity report, but also open the productivity report, parse
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through data for ATP’s other hundred or so wells, find the data for Well #4,
and then notice that the data differed from his August statements in a material
way. Absent an allegation that Reese was alerted to the Well #4 data in some
way, inferring that Reese took those steps is less plausible than inferring that
he would not have read specific entries in the emailed reports.
Indeed, the allegations in the Complaint suggest that Reese may have
had good reason not to look at the reports without prompting. CW4, the person
charged with creating the production reports, never reported directly to Reese.
Additionally, Reese did not attend the weekly production meetings where the
reports were discussed. Instead, CW4 reported to George Morris, the Chief
Operating Officer, and Morris attended the production meetings. These
allegations indicate that Morris, not Reese, was charged with monitoring
production, and accordingly, strengthen the inference that Reese would likely
not have read the weekly production reports absent some basis for him to do
so. 1
Third, Reese’s position in the company does not aid Plaintiffs’ scienter
allegations. As a general matter, “[a] pleading of scienter may not rest on the
inference that defendants must have been aware of the misstatement based on
their positions within the company.” Abrams, 292 F.3d at 432 (citing In re
Advanta Corp. Sec. Litig., 180 F.3d 525, 539 (3d Cir. 1999)). However, in
Nathenson, we held that occasionally “special circumstances” would permit a
plaintiff to plead scienter by pleading a defendant’s position in the company.
267 F.3d at 425.
The ‘special circumstances’ cases exhibit some
combination of four considerations that might tip the
In short, the Complaint here alleged facts that undercut the inference that Reese
1
read the Well #4 production data. Accordingly, we have no occasion to decide, as a general
matter, when an executive can be charged with knowledge of specific facts based on the
allegation that the executive received an email containing those facts.
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scales in favor of an inference of scienter. First, the
smaller the company the more likely it is that
corporate executives would be familiar with the
intricacies of day to day operations. Second, the
transaction at issue may have been critical to the
company’s continued vitality. Third, the
misrepresented or omitted information at issue would
have been readily apparent to the speaker. Fourth,
the defendant’s statements were internally
inconsistent with one another.
Diodes, 810 F.3d at 959 (internal citations omitted).
The “special circumstances” exception does not apply here. First, with
over 60 employees, ATP was approximately twice as large as the companies in
the cases where this court has found a “special circumstance.” See Nathenson,
267 F.3d at 425 (32 to 35 employees); Dorsey v. Portfolio Equities, Inc., 540 F.3d
333, 342 (5th Cir. 2008) (no employees). Second, Well #4 was not material
enough to place this case into the “special circumstances” category. That is not
to say that Well #4 was not important to ATP. ATP’s own August 24, 2011
report indicated that Well #4 was projected to produce 22.5% of ATP’s total
output. However, this court’s jurisprudence requires more. Indeed, this court
has previously found that the “special circumstances” doctrine was not
implicated by statements concerning an asset that comprised 22% of the
respective company’s total portfolio. See Jastrow, 789 F.3d at 540
(“Defendants’ alleged misstatement of the MBS portfolio valuation was not as
crucial to the continuing operation of Guaranty as were the misstatements
regarding the patent’s applicability in Nathenson. Although Guaranty’s non-
agency MBS portfolio was undeniably a large and important business asset, it
is not alleged to have been Guaranty’s single product, instead comprising at all
relevant times no more than 22% of Guaranty’s total assets.”); see also Abrams,
292 F.3d at 438 (Parker, J., concurring). Third, as explained above, Plaintiffs’
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allegations fail to create a strong inference that it would have been readily
apparent to Reese that his re-articulation of the August 24 report materially
misstated Well #4’s true production. And, last, Plaintiffs concede that Reese’s
statements were not internally inconsistent with other ATP speakers. Taking
all these factors together, we conclude that Plaintiffs have failed to plead facts
that would make this a “special circumstances” case.
In short, viewing Plaintiffs’ allegations as a whole, we agree with the
district court that Plaintiffs failed adequately to allege scienter with regard to
Reese’s statements.
B. Liquidity and Clipper
From 2010 to 2012, Defendants represented, in various ways, that ATP
had sufficient liquidity to meet its capital needs. For example, in September
2011, Reese stated that ATP had a “solid capital position,” and in April 2012,
Reese stated that “[l]iquidity is sound.” Defendants further opined that ATP
had sufficient capital to fund the Clipper project, which Defendants
represented would add significant production. Plaintiffs allege that each of
these statements was false and misleading because ATP’s capital position
crumbled from 2010 to 2012 such that it had no hope of completing the Clipper
project. Even if the statements were false, we hold that Plaintiffs failed
adequately to plead scienter.
First, the fact that ATP continuously disclosed its worsening cash
position belies a claim of scienter. From 2010 to 2012, ATP’s financial
statements and the notes that accompanied them repeatedly warned investors
that ATP had negative working capital and that ATP was financing its short-
term cash or service needs by ceding shares of its long-term profits. It would
have made little sense for Defendants to simultaneously disclose to, and
mislead, the public about ATP’s liquidity position. For this reason,
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“[a]dditional transparency . . . further negates the inference of scienter.”
Jastrow, 789 F.3d at 541; see also Diodes, 810 F.3d at 960.
Second, the nature of ATP’s cash position undercuts Plaintiffs’ scienter
allegations. There were ample grounds to disagree about the state of ATP’s
finances from 2010 to 2012. As the company itself explained in May 2012, “[i]n
the event we do not achieve the projected production and cash flow increases
[from ATP’s planned future projects], we will attempt to fund any short-term
liquidity needs through other financing sources[.]” However, the company
warned that “there is no assurance that we will be able to do so in the future if
required to meet any short-term liquidity needs.” Thus, ATP’s financial
condition by 2012 was essentially a disclosed bet on future production. ATP
had highly leveraged its future cash flows to continue production and
exploration. This placed a great deal of pressure on the limited number of
producing wells that ATP operated. Indeed, the pressure on ATP’s production
was so great that, according to ATP’s first quarter 2012 Form 10-Q, any
significant disruption to its business “could have a material adverse effect
on . . . [ATP’s] ability to meet [its] commitments as they come due.”
Nonetheless, if ATP had been able to bring its planned new production online,
it could have secured significant increased revenue. Certainly, a reasonable
investor could have looked at this situation and concluded that ATP’s financial
condition was untenable. Indeed, some investors did precisely that; for
example, Moody’s issued a report in September 2011 suggesting that ATP had
a “high likelihood” of restructuring. But that was not the only reasonable view
of ATP’s finances. If ATP could bridge its liquidity gap and begin to benefit
from its planned new wells, the company could have tapped into significant
revenue. Against this backdrop, Defendants were not required to “present an
overly gloomy or cautious picture of the company’s current performance[]” so
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long as their statements were “reasonably consistent with reasonably available
data.” Abrams, 292 F.3d at 433.
Third, the timing of ATP’s liquidity statements does not support an
inference of scienter. It is true that in May 2012, ATP indicated that it was
within its financing capability, and three months later, ATP declared
bankruptcy. Plaintiffs argue that this temporal proximity establishes scienter,
citing to Plotkin, 407 F.3d 690. In Plotkin, the court noted that “allegations of
later-emerging facts can, in some circumstances, provide warrant for
inferences about an earlier situation. For example, the fact that a business
files for bankruptcy on ‘Day Two,’ may, under the right surrounding
circumstances, provide grounds for inferring that the business was performing
poorly on ‘Day One.’” Id. at 698 (citing Novak v. Kasaks, 216 F.3d 300, 313 (2d
Cir. 2000)). However, Plotkin does not aid the inference of scienter here
because ATP disclosed its capital position in May 2012. That is, the inference
that Plotkin endorses would allow the court to infer that ATP had potential
liquidity problems in May 2012. However, that inference says nothing about
Defendants’ scienter because ATP disclosed those liquidity concerns. The same
is true with regard to ATP’s decision to hire bankruptcy counsel in June or July
of 2012. ATP had disclosed its liquidity problems to the market in May 2012.
The fact that a month later ATP would consult bankruptcy counsel hardly
indicates that ATP’s executives knew that they would run out of cash. Indeed,
many companies engage bankruptcy counsel to explore restructuring options
before management is sure that the company will fail. See, e.g., Richard M.
Cieri, The Role of a Restructuring Lawyer, in Arthur J. Abramowitz Et. al.
Inside the Minds: The Art and Science of Bankruptcy Law,
http://www.gibsondunn.com/fstore/documents/pubs/Cieri_Restructuring_Law
yer.pdf (“The goal of a restructuring lawyer is to stay out of bankruptcy.
Therefore, a restructuring lawyer is successful when a company never has to
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commence a bankruptcy case. In the vast majority of cases, bankruptcy should
be the last option because it is a very difficult and expensive process.”).
Fourth, and for similar reasons, neither the bankruptcy trustee’s
allegations, McCarroll’s assessment of ATP’s financial conditions, the
Confidential Witnesses’ assessments of ATP’s liquidity, nor the Bankruptcy
Judge’s determination that ATP filed bankruptcy too late established an
inference of scienter. The fact that others disagreed with Defendants’
assessments of ATP’s liquidity does not indicate that Defendants’ assessments
were not truly or reasonably held. See, e.g., Jastrow, 789 F.3d at 545 (finding
that a Confidential Witness’s disagreement with management about whether
to rely on ratings agencies did not contribute to an inference of scienter); Zucco
Partners, LLC v. Digimarc Corp., 552 F.3d 981, 999 (9th Cir. 2009), as amended
(Feb. 10, 2009) (finding that “disagreement among employees with regard to
the proper scrap rate, is not enough to establish a cogent or compelling scienter
allegation”).
Fifth, Plaintiffs’ motive allegations do not support an inference of
scienter. Plaintiffs contend that the motive to raise capital here was more than
typical because ATP needed to raise funds to continue its operations. Here,
ATP’s opportunity to mislead potential capital partners was severely limited
by ATP’s continuous disclosure of its liquidity position. Moreover, the fact that
Plaintiffs have not alleged that Defendants themselves profited from their
alleged misstatements undercuts a motive allegation. See Jastrow, 789 F.3d
at 545 n.18; Nathenson, 267 F.3d at 421 (“[T]he fact that the other defendants
did not sell their shares during the relevant class period undermines plaintiffs’
claim.” (quoting Acito v. IMCERA Grp., Inc., 47 F.3d 47, 54 (2d Cir. 1995)).
Again, viewing the Complaint as a whole, we hold that Plaintiffs’
allegations of scienter as to ATP’s liquidity and the Clipper project fail as a
matter of law.
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Case: 15-31094 Document: 00513963156 Page: 17 Date Filed: 04/21/2017
No. 15-31094
C. McCarroll’s Resignation
On June 1, 2012, ATP issued a press release announcing that Matt
McCarroll had been hired as CEO, replacing Defendant Bulmahn. Six days
later, on June 7, 2012, ATP issued a second press release announcing that ATP
“was unable to reach a mutually agreeable employment agreement with Mr.
McCarroll and effective today he has submitted his resignation.” Plaintiffs
contend that the reason given for McCarroll’s resignation was false or
misleading.
However, nothing in the Complaint indicates that McCarroll informed
either Bulmahn or Reese, or indeed anyone at ATP, of his reason for resigning.
For example, when McCarroll claimed that he recommended restructuring but
the Board declined, he did not indicate that he conditioned his employment on
the Board restructuring. Likewise, when McCarroll told a private investigator
that ATP’s finances were a disaster, he did not indicate that he made that
statement to anyone at ATP or that he told ATP that he resigned because of
the company’s financial condition. Absent some allegation that McCarroll
informed someone at ATP why he resigned, there is no basis for the court to
conclude that Bulmahn and Reese knew or were reckless in not knowing
McCarroll’s “true” reasons. See Southland, 365 F.3d at 361 (“[W]e will not
‘strain to find inferences favorable to the plaintiffs.’” (quoting Westfall v. Miller,
77 F.3d 868, 870 (5th Cir. 1996)).
We AFFIRM.
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