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Mooney v. Pioneer Natural Resources Co.

Superior Court of Delaware

October 24, 2017

MATTHEW B. MOONEY, Plaintiff,
v.
PIONEER NATURAL RESOURCES COMPANY, Defendant.

          Submitted: July 27, 2017

         On Defendant Pioneer Natural Resources Company's Motion to Dismiss. GRANTED, WITH LEAVE FOR PLAINTIFF TO AMEND THE COMPLAINT.

          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 Benjamin Britz, Hughes Hubbard & Reed LLP, Washington, DC, pro hac vice, Attorneys for Defendant Pioneer Natural Resources Company.

          MEMORANDUM OPINION

          RICHARD R. 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 performance.[1] 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] Plaintiffs 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 investment.[4]

         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] 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] Specifically, 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.[10]

         Defendant released its fourth quarter ("Q4")[11] 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.[13]

         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 $383 million of cash on hand and a net debt-to-book capitalization of 21%."[15]

         On May 22, 2015, Plaintiff "established an investment position in Defendant's securities.[16] 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.[17]

         Defendant provided an update on its production and derivatives hedging program for Q2 of 2015, on July 22, 2015.[18] 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."[19]

         Defendant reported Q2 2015 results on August 4, 2015, which showed another decrease in its cash balance.[20] Defendant earned $.10/share on $648 million of revenue.[21]

         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 Contentions

         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 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 Plaintiffs 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]

         Fifth, Defendant argues that Plaintiff has failed to properly allege damages in his complaint because he has failed to identify the nature of his investment.[37]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 transactions.[38] Further, Defendant argues that Plaintiff failed to plead that his damages were a result of his alleged reliance.

         B. Plaintiff's Contentions

         Plaintiffs 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]

         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] Plaintiffs 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 Hubbard v. Hibbard Brown.[49] Plaintiff argues that a reasonable investor would have considered Sheffield's comments material.[50]

         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]

         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]

         V. DISCUSSION

         Plaintiffs 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 investment.[63]

         A. Plaintiff Fails to Adequately Plead a Claim for Common Law Fraud. 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]
Plaintiffs 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]

         Delaware courts have often held that "[e]xpressing opinions or predictions about the future, however, 'cannot give rise to actionable common law fraud.'"[67] "In 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]

         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 Plaintiffs allegations against Defendant is that Defendant misrepresented its own hedge program, cash flows and asset values. It 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 Commc'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. Plaintiffs 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.

         3. Plaintiff has failed to adequately allege intent or scienter.

         Plaintiffs 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] Federal courts have also held that intent may not be pled merely because corporate officers sold stock.[81]

         Plaintiff also argues that, because intent may be averred generally, he may allege "strong circumstantial evidence of conscious misbehavior or recklessness."[82]Plaintiffs argument is essentially that intent may be inferred because Defendant allegedly made false statements.[83] 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).[84] However, Plaintiff does not adequately plead "circumstantial evidence of conscious misbehavior, " let alone "strong circumstantial evidence" of the same. With the exception of his claim that Defendant made stock offerings in three consecutive years, [85] Defendant points to no evidence, circumstantial or direct, from which intent may be inferred.

         The Court of Chancery stated in Trenwick Am. Litig. Tr. v. Ernst & Young, L.L.P. that "backwards-looking arguments" that fraud must have occurred because a plaintiff suffered damages will be rejected.[86] 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 ...


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