City of Riviera Beach General Employees Retirement System v. Macquarie…

Background

The action was filed as a securities-fraud class action. After the court consolidated it with a related action, Moab Partners, L.P. became the lead plaintiff and filed a consolidated complaint. The defendants named in the opinion included Macquarie Infrastructure Corporation, Macquarie Infrastructure Management (USA) Inc., Barclays Capital Inc., several Macquarie and International-Matex Tank Terminals-Bayonne, Inc. officers, and other individual defendants.

The alleged class period ran from February 22, 2016, through February 21, 2018. The claims concerned Macquarie’s subsidiary, International-Matex Tank Terminals-Bayonne, Inc., which stored liquid commodities, including No. 6 fuel oil. No. 6 fuel oil generally has a higher sulfur content than permitted by IMO 2020, a regulation adopted by the International Maritime Organization that was scheduled to impose a 0.5% sulfur limit on marine fuels beginning in 2020.

The consolidated complaint asserted claims under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5, along with claims under Sections 20(a) and 20A of that Act and Sections 11, 12(a)(2), and 15 of the Securities Act. The plaintiff alleged that the defendants made material misrepresentations and omissions about the storage business’s exposure to No. 6 fuel oil and the risks posed by IMO 2020. The complaint also relied on statements concerning the company’s business, a secondary public offering in which more than $235 million of company stock was sold, and the acquisition of Epic Midstream.

Legal Standards

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint plausibly states a legal claim. Securities-fraud claims also must satisfy heightened pleading requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. Those requirements include identifying the allegedly misleading statements, explaining why they were misleading, and pleading particular facts supporting a strong inference of scienter—meaning an intent to deceive, manipulate, or defraud, or conduct approaching that level of recklessness.

The court explained that securities law does not require a company to disclose every fact that an investor might want to know. A duty to disclose may arise when a company makes a specific statement that becomes misleading because of an omission, or when a statute or regulation requires disclosure. For an omission under Item 303 of Securities and Exchange Commission Regulation S-K to support a Section 10(b) claim, the plaintiff must allege a known trend, event, or uncertainty that was material under the applicable probability-and-magnitude analysis.

Court’s Analysis

The court held that the plaintiff did not identify actionable half-truths. In the court’s view, the challenged statements were either generic corporate descriptions, historical accounts, or statements that did not specifically address how much No. 6 fuel oil the storage facilities handled. The court also found that the plaintiff did not plausibly allege that the statements were false when made. Statements by the company’s new chief executive that the late-2017 loss of customers was sudden and surprising were not adequately contradicted by the former-employee allegations cited in the complaint.

The court separately rejected the Item 303 theory. The plaintiff did not identify a specific uncertainty that should have been disclosed, identify the securities filing in which the disclosure should have appeared, or adequately allege when the defendants actually knew of a material trend or uncertainty requiring disclosure. The court also concluded that the complaint did not adequately plead materiality under the probability-and-magnitude test.

The court then held that the complaint did not plead scienter. Compensation tied to the company’s market capitalization was a motive common to corporate officers and was not enough by itself. The proposed acquisition-related motive and the stock offering also did not establish a strong inference of fraudulent intent when considered with the absence of alleged stock sales by individual defendants, the management company’s continued acceptance of some fees in stock, the time between the offering and the stock-price decline, and the management company’s earlier stock sale. Taken together, the allegations suggested at most negligence concerning the risks to the No. 6 fuel-oil storage business, which was not legally sufficient to establish scienter.

Disposition

The court held that the remaining claims failed because they depended on a primary securities-law violation or on adequately pleaded material misrepresentations or omissions. The court therefore granted the defendants’ motions to dismiss the consolidated complaint. The opinion does not state that the motions were granted with or without prejudice.