In Re Aqua Metals, Inc. Securities Litigation

Background

This consolidated securities class action was brought by Plymouth County Retirement Association, Denis Taillefer, and 1103371 Ontario Ltd. on behalf of people who purchased or otherwise acquired Aqua Metals common stock between May 19, 2016, and November 9, 2017. The plaintiffs sued Aqua Metals, Inc. and co-founders Stephen R. Clarke, Thomas Murphy, and Selwyn Mould.

The plaintiffs alleged violations of Section 10(b) of the Securities Exchange Act of 1934, Securities and Exchange Commission Rule 10b-5, and Section 20(a) of the Exchange Act. They claimed that defendants made materially false or misleading statements about Aqua Metals’ AquaRefining battery-recycling technology, the company’s transition to commercial operations, production levels, revenues, partnerships, licensing plans, and the problems encountered when scaling the technology.

The court had previously dismissed a misrepresentation claim with permission to amend, while declining to dismiss a scheme-liability claim and a control-person claim. The second amended complaint added allegations identifying the challenged statements and describing why the plaintiffs contended they were false. In the motion addressed here, defendants challenged the misrepresentation claim and the control-person claim to the extent it depended on that claim.

Court’s analysis

The court applied the standard for dismissal for failure to state a claim. It also applied heightened pleading requirements for securities fraud, including the requirement that the complaint identify each misleading statement, explain why it was misleading, and plead particular facts supporting a strong inference of scienter—meaning an intent to deceive or deliberate recklessness.

The court held that statements about commissioning the AquaRefining facility and commercializing the process were protected by the Private Securities Litigation Reform Act’s safe harbor for forward-looking statements. The company had repeatedly warned that it had tested the technology only on a small scale, that it might not be able to reproduce the process economically on a large scale, and that scaling could create unexpected costs or other obstacles.

The court also treated statements about projected production levels and revenues as forward-looking and found that the company’s warnings were sufficient to trigger the safe harbor. The warnings did not need to identify the exact problem that later occurred; they needed to identify important factors that could cause actual results to differ materially from the projections.

For statements that were not forward-looking, the court found that the confidential-witness allegations did not adequately contradict the company’s statements. The witnesses described problems with scaling, but their accounts also indicated that the technology worked to some extent and that some lead was produced. The court further found that the company had disclosed that it was not producing AquaRefined lead in commercial quantities and that its reported revenue came from lead compounds and plastics instead.

The court rejected the argument that the company’s later failure to achieve commercial production until 2018, by itself, made its earlier statements false or misleading. The court also found that statements describing the technology, partnerships, or company progress in optimistic terms were nonactionable corporate optimism, opinion, or “puffery”—vague statements that investors would not reasonably rely on as objectively verifiable facts.

The court separately found that the complaint did not adequately plead scienter. The primary confidential witness was described only as an engineer who worked at Aqua Metals from 2015 to January 2017. The complaint did not identify the witness’s title, reporting relationship, or relationship to the individual defendants sufficiently to establish personal knowledge or reliability. The court also found that the other witnesses’ allegations about staged demonstrations, photographs, and production were speculative, based on hearsay, or unsupported by personal observation.

The alleged insider stock sales did not supply the required inference of scienter. Clarke, who made many of the challenged statements, was not alleged to have sold Aqua Metals stock during the class period. Although Mould and Murphy were alleged to have sold shares, the complaint did not allege what percentage of their holdings they sold, and the cited records showed that each retained more than 90 percent of his Aqua Metals stock. The court also noted that some sales occurred under predetermined trading plans.

The court rejected the claims against Mould and Murphy based on statements they allegedly did not make. Under the governing rule, the maker of a statement is the person or entity with ultimate authority over its content and communication. The court found no allegations that Mould signed the company’s filings or press releases or controlled their content. Murphy’s attendance on earnings calls, status as a company contact, and signing of filings did not, without allegations of ultimate control and authority, establish that he made the challenged statements. The court also found Mould’s challenged statements about the Johnson Controls partnership to be nonactionable optimism or opinion, and found Murphy’s alleged statements insufficiently connected to actionable misrepresentations.

Disposition

The court granted defendants’ motion to dismiss the Section 10(b), Rule 10b-5(a) and (c) scheme-liability claim and the Section 20(a) control-person liability claim as it related to Count One, without leave to amend. The court stated that the plaintiffs had already had an opportunity to amend and had again failed to plead viable causes of action. The court set a further telephonic case-management conference to address promptly resolving the remaining causes of action.

Judge Haywood S. Gilliam, Jr. signed the order.