IN RE RENEWABLE ENERGY GROUP SECURITIES LITIGATION

Background

Investors in Renewable Energy Group (REG), a producer of biodiesel fuel, brought a federal securities class action against REG and four of its officers. The amended complaint asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, and a control-person claim under Section 20(a) against the Individual Defendants.

The investors alleged that statements about the adequacy of REG’s accounting and operating controls artificially inflated REG’s stock price between March 8, 2018, and February 25, 2021. The allegations concerned two events. First, REG disclosed in June 2020 that calculation errors connected to accounting staff working from home had caused it to revise its projected second-quarter adjusted earnings before interest, taxes, depreciation, and amortization from a gain of $20 million to $35 million to a range from a $2 million loss to a $12 million gain. Second, REG disclosed in February 2021 that petroleum diesel had periodically not been added to certain biodiesel loads at its Seneca, Illinois facility. REG agreed to return $40.5 million in biodiesel mixture excise tax credits for 2017 through the first three quarters of 2020.

Legal standard

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. For securities-fraud claims, the Private Securities Litigation Reform Act and Rule 9(b) require detailed allegations of fraud. The disputed issue was scienter—whether the defendants acted with the required intent or with extreme recklessness.

To plead scienter, the investors had to allege particular facts creating a strong inference that the defendants knew their statements were inaccurate or acted with conduct approaching actual intent. The court had to consider both inferences supporting the investors and reasonable, non-fraudulent explanations for the defendants’ conduct.

Court’s analysis

The court held that the amended complaint did not adequately plead scienter. The investors did not allege that any defendant personally benefited from the alleged fraud or deliberately engaged in illegal conduct. They also did not identify specific reports or other information that any defendant knew or should have known about and that would have revealed either the pandemic-related calculation errors or the Seneca blending problems.

The court rejected the argument that REG’s discovery of the Seneca problem during preparation for an Internal Revenue Service audit showed that the defendants had known about it for a significant period. The complaint did not allege when the problem was discovered, and its allegations were consistent with discovery during the fourth quarter of 2020 followed by investigation and disclosure. The court stated that a company may take time to investigate a detected problem before reporting it publicly.

The court also rejected the argument that the complaint established corporate scienter through systemic recklessness and repeated certifications of effective internal controls. The court characterized the alleged misstatements, at most, as resulting from negligence in maintaining internal controls, not collective fraudulent conduct. Finally, the court held that the size of the accounting error, by itself, was insufficient to establish recklessness.

Disposition

The court granted the defendants’ August 6, 2021 motion to dismiss. The opinion directed the Clerk of Court to close the case. The opinion did not state that the motion or the case was dismissed with or without prejudice.