In Nakkhumpun v. Taylor, Civil Action No. 12-cv-01038-CMA-CBS, the United States District Court for the District of Colorado denied the motion to amend a dismissed class action suit against former executives of Delta Petroleum Corporation, a now bankrupt oil and gas company (“Delta”) (“Defendants”), by Patipan Nakkhumpun, an individual investor, on behalf of all persons similarly situated (“Plaintiffs”).
Plaintiffs' claims focused on a number of allegedly inaccurate statements. They included allegations that Delta had misstated the reasons negotiations ended with Opon International (“Opon”) over the sale of $400 million in assets. In addition, Defendants allegedly misrepresented Delta’s financial condition by stating that Delta’s liquidity had “improved materially" and that the company was in "a far better liquidity and financial situation" than a year earlier. In dismissing the former, the court found an absence of causation. With respect to the latter, the court found that Plaintiffs had not shown the statements to have been false.
In their amended complaint, Plaintiffs alleged that the misrepresentations concerning the negotiations with Opon “caused” their losses as a result of the “materialization of the concealed risk.” This theory requires a plaintiff to allege that the risk which caused the loss was within the zone of risk concealed by the misrepresentation and that the share price dropped because of the risk.
Plaintiffs asserted that Delta had concealed three risks that caused the drop in share prices: the assets were not worth $400 million; the assets were not marketable at $400 million; and Delta’s inability to sell the assets at a high price would force it to file for bankruptcy.
The first alleged risk failed because Defendants do not owe a legal duty to disclose the value Opon assigned to Delta’s assets. The third alleged risk also failed because there were too many intervening events that could have led to Delta’s bankruptcy. Only the second alleged risk was found to be within the zone of risk concealed by the misrepresentations.
Nonetheless, the amended complaint could not survive because Plaintiffs failed to allege a strong inference that the July 2010 statement was made with scienter. The court ruled that the general motives for executives to further the interests of the corporation, such as signaling to potential partners that assets are marketable at a certain price, fail to raise an inference of scienter.
With respect to the statements about Delta’s liquidity, the court found that the allegations and clarifications added to the amended complaint were not sufficient to allege that the statements were false.
In considering each of the proposed amendments, the court concluded that the amended complaint could not survive a motion to dismiss.
The primary materials for this case can be found on the DU Corporate Governance website.