In Fries v. Northern Oil and Gas, Inc., No. 16-cv-06543-ER, 2018 BL 9786 (S.D.N.Y. Jan. 10, 2018), the United States District Court for the Southern District of New York granted a motion to dismiss the Consolidated Amended Complaint (“CAC”) of Matthew Atkinson (“Plaintiff”) against Northern Oil and Gas, Inc. (“Northern Oil”) and Northern Oil executives, Michael L. Reger (“Reger”) and Thomas W. Stoelk (“Stoelk”), (collectively “Defendants”), alleging violations of the Securities Exchange Act of 1934, as amended (“Exchange Act”) for violations of Section 10(b) and 20(a). The court held the Plaintiffs failed to state a claim.

While holding his position with Northern Oil, Reger co-founded Dakota Plains Holdings, Inc. (“Dakota Plains”), a non-party to the suit. The complaint alleged Reger’s improper financial control over Dakota Plains, which came under investigation by the United States Securities and Exchange Commission (“SEC”), affected Northern Oil’s stock price. Upon notifying Northern Oil of his Wells Notice, Reger was terminated, and concurrently, Northern Oil’s stock price fell 6.28%. Plaintiff asserted the Defendants made fraudulent representations and omissions in their public filings, including, among other assertions, that Northern Oil’s policies and Code of Business Conduct and Ethics (“Code of Ethics”) were inadequate to prevent and detect misconduct, and Reger’s involvement with Dakota Plains violated Northern Oil’s conflicts of interest policies. Additionally, Plaintiff asserted the statements regarding Reger’s expertise were false and misleading because the Defendants did not disclose Reger’s: (1) stake in Dakota Plains, (2) SEC violations, and (3) stock manipulation scheme. Finally, Plaintiffs asserted he relied on the Defendants’ disclosures, which prompted him to pay “artificially inflated prices” for Northern Oil stock.

Section 10b–5 of the Exchange Act makes unlawful, any omission of a material fact or untrue statement of a material fact necessary to make the statement not misleading. To succeed on a claim of a 10b-5 violation the burden is on the plaintiff to prove (1) material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. An omission is material when there is a substantial likelihood that a reasonable investor would view the disclosure as significantly altering the total mix of information available. All private securities fraud complaints are subject to the heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”) requiring the complaint to plead, with particularity,both falsity and scienter. Under the PSLRA, a plaintiff may establish scienter by alleging facts that show either (1) that the defendant had the “motive and opportunity” to commit the alleged fraud, or (2) strong circumstantial evidence of conscious misbehavior or recklessness.

The Court held the Plaintiff failed to allege any actionable misstatements or omissions, and failed to plead sufficient evidence to infer scienter. First, there were no allegations the Defendants made repeated assurances regarding the Code of Ethics, just that they adopted it annually. Second, the statements about Reger’s expertise were not inaccurate. Third, none of the Plaintiff’s allegations addressed whether: (1) Northern Oil and Stoelk were aware of Reger’s illegal activity with Dakota Plains; (2) Reger was in violation of the Code of Ethics, or (3) Reger failed to fulfill his role as CEO. Further, the court held the Dakota Plains allegations were entirely unrelated to Northern Oil, and Reger’s failure to disclose the SEC investigation was negligent, not fraudulent. Reger’s alleged violations of the Code of Ethics were not intentionally fraudulent,  but “mere mismanagement.” Thus, the court determined the Plaintiff’s scienter argument, regarding Reger, was not compelling. The court noted that Northern Oil’s termination  of Reger undermined scienter with regard to the company. Finally, Plaintiff’s failure to adequately plead an underlying Section 10(b) claim rendered the Section 20(a) claims invalid.

For the above reasons, the court granted Defendant’s motion to dismiss with Leave to Amend.

The primary materials for this case may be found on the DU Corporate Governance website.