No Confession Required

As The 10b-5 Daily recently has noted, it is difficult for corporate defendants to avoid securities fraud liability when they fail to disclose hidden wrongdoing at the company.  But what if the company’s CEO is engaged in hidden wrongdoing at a different company?

In Fries v. Northern Oil & Gas, Inc., 2018 WL 388915 (S.D.N.Y. Jan. 11, 2018), Northern Oil fired its CEO after the SEC sought to bring an enforcement action against him.  The enforcement action was based on the CEO’s activities at an unrelated company, Dakota Plains Transport, which he had founded.  When Northern Oil announced the dismissal of its CEO, its stock price dropped and a securities class action was filed.  The plaintiffs alleged that Northern Oil had omitted material facts about the CEO’s wrongdoing at Dakota Plains when the company made statements about its Code of Business Conduct and Ethics and the CEO’s value to the business.

The court found that the plaintiffs had failed to adequately plead that Northern Oil made any false statements.  A failure to disclose wrongdoing is only actionable if the “non-disclosures render other statements by defendants misleading.”  The company did not tout its compliance with its Code of Business Conduct and Ethics and there was nothing inaccurate about the company’s statements concerning its reliance on the CEO’s expertise and industry contacts.  Accordingly,  the hidden wrongdoing at Dakota Plains did not make those statements actionable.

Holding: Motion to dismiss granted.  (The court also found that the plaintiffs failed to adequately plead scienter.)

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