June 18, 2019

Tenth Circuit: Statements as to Reason for Deal Failure Could Have Materially Misled Investors

The Tenth Circuit Court of Appeals issued its opinion in Nakkhumpun v. Taylor on Tuesday, April 7, 2015.

Patipan Nakkhumpun, lead plaintiff in a securities class action against executives of Delta Petroleum Corp., filed suit in district court after a deal between Delta and Opon International, LLC fell through. Plaintiffs alleged the Delta executives violated § 10(b) of the Securities Act and SEC Rule 1ob-5 by misleading investors through statements about the proposed transaction with Opon and about Delta’s financial condition. The district court granted Defendants’ motion to dismiss, holding Plaintiffs failed to allege loss causation regarding the Opon deal and falsity regarding the statements about Delta’s financial condition. Plaintiffs moved for leave to amend, which the district court denied.

Plaintiffs appealed, and the parties dispute whether Plaintiffs adequately pled falsity, scienter, and loss causation as to the Opon transaction and falsity and scienter as to the financial statements. The Tenth Circuit first addressed the Opon transaction.

Delta issued a press release in March 2010 announcing a preliminary agreement with Opon, in which Opon would purchase a 37.5% non-operating interest in Delta’s Vega Area assets for $400 million. Defendants issued more press releases between March and June 2010 indicating that Opon was trying to obtain financing for the transaction, and in a July 2010 press release, Delta board chair Taylor announced termination of the deal, stating that Opon failed to receive financing. However, confidential informants related that the Opon deal fell through because Opon determined the assets were not worth $400 million and refused to pay that price, and further negotiations between Opon and Delta were unsuccessful.

The district court agreed with Plaintiffs that the statements were false or misleading but concluded Plaintiffs failed to show loss causation. On appeal, Plaintiffs argue they alleged all requirements for securities fraud under § 10(b), and the Tenth Circuit agreed. The Tenth Circuit found a reasonable investor would have been lead to believe that the Vega Area assets were worth $400 million, satisfying the falsity prong. The Tenth Circuit also found Plaintiffs established scienter, finding potential for Taylor’s statements to mislead buyers and sellers and noting the danger was so obvious Taylor must have been aware of it. The Tenth Circuit reversed the district court’s dismissal of Plaintiffs’ § 10(b) claim on this issue.

Turning next to the loss causation issue, the Tenth Circuit affirmed the district court’s finding that Plaintiffs’ proposed amended complaint contained adequate allegations of loss causation under a theory of materialization of a concealed risk. Plaintiffs pleaded particular facts tying financial loss to Taylor’s misleading explanation about the reason the Opon deal fell through.

The Tenth Circuit found adequate support for Plaintiff’s § 10(b) arguments as to defendant Taylor, but not regarding the other named defendants. The Tenth Circuit therefore affirmed the dismissal of Plaintiffs’ complaint as to the other named defendants.

Finally, the Tenth Circuit turned to Plaintiffs’ claims that Defendants made false or misleading statements regarding its financial situation. In the district court and on appeal, Defendants challenged these statements as failing to allege scienter or falsity. The district court granted Defendants’ motion to dismiss on the ground that the statements were not false. The Tenth Circuit affirmed the dismissal but on the ground that the statements were missing allegations of either scienter or falsity.

The Tenth Circuit reversed the dismissal of Plaintiffs’ Opon-related claims as to defendant Taylor but affirmed as to all other defendants. On the claims of misleading financial statements, the Tenth Circuit affirmed the district court’s dismissal and denial of leave to amend.

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