Jon D. Gruber v. Ryan R. Gilbertson

Background

Jon D. Gruber brought this securities-fraud action individually and on behalf of a proposed class. The opinion describes allegations that Ryan R. Gilbertson and Michael Reger controlled Dakota Plains Holdings, Inc. through nominees and allied directors and officers, held substantial portions of the company’s notes, and concealed those interests from investors.

The alleged scheme involved an “additional payment” provision that could pay noteholders based on Dakota Plains’s stock price during the first twenty days of public trading. The opinion states that Gilbertson and Reger helped arrange trading that raised the stock price to approximately $12 per share during that period, triggering the provision and creating a $32.851 million payment obligation. The company later restructured the payment obligation, and Gilbertson and Reger received additional debt or other benefits.

The plaintiffs alleged that Dakota Plains’s public filings failed to disclose Gilbertson and Reger’s control, ownership, note purchases, and related-party transactions. The opinion also describes later shareholder complaints, an internal investigation that found potential improper activity and self-dealing, regulatory actions, criminal convictions involving Gilbertson, and Dakota Plains’s bankruptcy. The court had previously allowed claims under Sections 10(b), 20(a), and 20A of the Securities Exchange Act to proceed and certified a class covering investors who purchased or acquired Dakota Plains common stock from March 23, 2012, through August 16, 2016, along with a subclass of contemporaneous traders.

Motions and parties’ arguments

The defendants filed three motions: a motion for summary judgment, a motion to exclude expert testimony, and a motion to decertify the class. On summary judgment, the defendants argued that the plaintiffs could not prove loss causation—the required connection between the alleged misconduct and the investors’ losses. They also argued that the director and officer defendants lacked the required fraudulent intent, known as scienter, and that Gilbertson and Reger lacked evidence of a fiduciary duty and contemporaneous insider trading for the Section 20A claims.

The plaintiffs relied in part on expert Bjorn Steinholt. Steinholt opined that Dakota Plains had effectively no value because of the alleged pervasive fraud. He also offered a regression analysis intended to address market factors. The defendants argued that Steinholt’s opinions were unreliable because he did not conduct a conventional event study and failed to account for other possible causes of the stock-price decline.

The defendants also sought to exclude opinions from expert Steven Thel about beneficial ownership, Gilbertson and Reger’s incentives, and whether the director and officer defendants acted with scienter. Finally, the defendants argued that the class should be decertified because some investors allegedly knew about Gilbertson and Reger’s role, the case had become primarily a misrepresentation case rather than an omission case, and Gruber’s purchases were not typical because they began after the initial twenty-day manipulation period.

Court’s analysis

The court held that the plaintiffs had enough evidence to create triable disputes about loss causation. It rejected the argument that an event study was the only acceptable method for proving loss causation. The court concluded that Steinholt’s “zero enterprise value” opinion—that Dakota Plains was worthless because the alleged fraud made it an inherently corrupt enterprise—was sufficient at the summary-judgment stage to show that some investor losses could have resulted from the alleged fraud. The court did not need to decide at that stage whether Steinholt’s regression analysis was admissible.

The court also found sufficient evidence concerning scienter. It cited statements and other evidence suggesting that Dakota Plains’s directors and officers knew about, or recklessly failed to investigate, Gilbertson and Reger’s ownership, the additional payment provision, possible stock manipulation, and related concerns raised by investors and investigators. The court stated that a concrete personal benefit was not required to establish conscious misbehavior or recklessness. Because the court rejected the defendants’ challenges to the alleged primary securities violations, it also rejected their argument that the Section 20(a) control-person claims necessarily failed.

For the Section 20A insider-trading claims, the court concluded that evidence created issues about whether Gilbertson and Reger had significant ownership and control, participated in Dakota Plains’s affairs, possessed material nonpublic information, and traded contemporaneously with the plaintiff. The court therefore declined to grant summary judgment on those claims.

Expert testimony

The court applied Federal Rule of Evidence 702 and the reliability review required by Daubert. It allowed Thel to offer opinions about Gilbertson and Reger’s beneficial ownership because he had reviewed documents bearing on that issue. But it held that Thel could not offer opinions about Gilbertson and Reger’s incentives or whether the director and officer defendants acted with scienter. Those opinions addressed motivations and ultimate conclusions that the jury could decide without expert assistance.

The court declined to exclude Steinholt’s opinions merely because he did not conduct an event study. It stated that an event study is not mandatory and that the admissibility of an expert’s analysis is different from the weight a jury may give it. The court did not reach the admissibility of Steinholt’s regression because his zero-enterprise-value opinions were enough to defeat summary judgment on cause-in-fact loss causation.

Class certification

The court denied the motion to decertify the class. It found that the defendants’ examples of investors who knew about Gilbertson and Reger’s involvement did not show that a substantial portion of the more than 1,900 class members knew the specific facts at issue, including the alleged beneficial ownership, stock-price manipulation, and ownership of most of the notes. The court also rejected the argument that one expert’s description of a statement as a misrepresentation changed the plaintiffs’ case from an omissions case.

The court further held that Gruber’s claims were typical even though he began purchasing shares in February 2013, after the initial twenty-day trading period. According to the court, the alleged fraud was not merely the existence of the additional payment provision; it was the undisclosed ownership and manipulation scheme. Gruber purchased during the certified class period, and the court held that he did not need to purchase throughout the entire period.

Disposition

The court denied the defendants’ motion for summary judgment; granted in part and denied in part the motion to exclude expert testimony; and denied the motion to decertify the class. The clerk was directed to terminate the three motions. The opinion is signed by William H. Pauley III, Senior United States District Judge.