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IN RE EXXON MOBIL CORP. SECURITIES LITIGATION

September 14, 2005.

IN RE EXXON MOBIL CORP. SECURITIES LITIGATION.


The opinion of the court was delivered by: FREDA WOLFSON, Magistrate Judge

MEMORANDUM OPINION

Presently before the Court is a motion to dismiss the Consolidated Amended Class Action Complaint, which alleges violations of (i) Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78n(a), and Rule 14a-9(a) promulgated thereunder, 17 C.F.R. § 240.14a-9(a); (ii) Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; and (iii) Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). The motion to dismiss was filed by Exxon Mobil Corporation ("Exxon Mobil") and Lee R. Raymond*fn1 ("Raymond," together with Exxon Mobil, "Defendants"). The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1331 and 1337. For the reasons set forth below, Defendants' motion to dismiss is granted. I. BACKGROUND

A. Procedural history

  The initial complaint in this action was filed in this Court on February 17, 2004, under the caption Binz v. Exxon-Mobil Corp. and Lee R. Raymond, Civil Action No. 04-1257 (FLW). By Order of this Court on June 18, 2004, this case was consolidated with Estate of Hyman J. Rock v. Exxon-Mobil Corp. and Lee Raymond, Civil Action No. 04-1921 (FLW) under the caption In re Exxon Mobil Corp. Securities Litigation, Civil Action No. 04-1257 (FLW). Subsequently, an Order dated October 26, 2004 consolidated The Ohio Public Employees Retirement System, et al. v. Exxon-Mobil Corp. et al, Civil Action No. 04-2484 (FLW) and Ticktin v. Exxon-Mobil Corp. et al, Civil Action No. 04-3629 (FLW) with Exxon Mobil Corp. Sec. Litig., Civil Action No. 04-1257 (FLW). Ohio Public Employees Retirement System and State Teachers Retirement System of Ohio were appointed Lead Plaintiffs, by an Order dated July 20, 2004. Plaintiffs' Consolidated Amended Class Action Complaint (the "Complaint") was filed on October 4, 2004. Presently before the Court is Defendants' motion to dismiss the Complaint, pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b). For the reasons stated below, the Court grants Defendants' motion to dismiss Plaintiffs' securities fraud claims for being untimely, and while not necessary based upon the Court's ruling that the claims are time-barred, the Court also grants Defendants' motion to dismiss the Plaintiffs' claims for failure to plead with particularity as required by Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act (the "PSLRA").

  B. The Exxon-Mobil merger

  This is a class action brought under the federal securities laws on behalf of all persons and entities who were either holders of Mobil Corp. ("Mobil") common stock on May 27, 1999, when Exxon and Mobil shareholders voted to approve a proposed merger between the two companies, or who acquired Exxon stock on or about November 30, 1999, through a stock-for-stock exchange in connection with the merger.

  Exxon Mobil is an integrated oil and gas company that engages in the exploration for, and production of, crude oil and gas, the manufacture of petroleum products, and the transportation and sale of crude oil, natural gas and petroleum products. Compl. ¶ 24. On December 1, 1998, Exxon and Mobil publicly announced a planned merger, subject to shareholder approval. Id. ¶ 91. Pursuant to the merger, each share of Mobil stock would be exchanged for 1.32015 shares of Exxon stock (the "Exchange Ratio"). Id. ¶ 2. On April 5, 1999, the two companies issued a joint proxy statement (the "Proxy Statement") seeking shareholder approval of the proposed merger at Exxon's and Mobil's respective shareholder meetings to be held on May 27, 1999. See Paul F. Carvelli, Esq. ("Carvelli") Decl. Ex. D. This Proxy Statement incorporated by reference Exxon's Annual Report on Form 10-K ("10-K"), filed on March 26, 1999 with the Securities and Exchange Commission (the "SEC"), which contained Exxon's 1998 year-end financial statements. Compl. ¶ 92. Exxon also filed three quarterly reports on Form 10-Q ("10-Q") with the SEC, on May 15, 1999, August 13, 1999, and November 12, 1999, respectively, that incorporated statements regarding the proposed merger that were made in the Proxy Statement.*fn2 Id. ¶¶ 185, 187, 189; Pls. Opp. at 4.

  To be entitled to vote on the proposed merger, a Mobil shareholder had to own Mobil stock at the close of business on March 29, 1999. See Carvelli Decl. Ex. D. at II-2. On May 27, 1999, Mobil and Exxon shareholders approved the merger, and, after receiving regulatory approvals, the merger closed on November 30, 1999.*fn3 Compl. ¶¶ 3-4. Pursuant to the merger and Exchange Ratio, all Mobil shares were exchanged for Exxon shares in accordance with the Exchange Ratio, and Exxon subsequently changed its corporate name to Exxon Mobil Corp. Id. ¶ 4.

  1. Impairment of Exxon's oil and gas assets

  The gravamen of Plaintiffs' action alleges that Defendants, by failing to recognize in Exxon's 1998 year-end financial statements certain impairments to the long-term carrying value of Exxon's oil and gas assets, inflated Exxon's assets and earnings and thereby artificially inflated the value of Exxon stock to Mobil shareholders before the merger. Compl. ¶ 96. According to Plaintiffs, the steep drop in oil prices in 1998, see id. ¶¶ 88-89, required Exxon to report the impairment of its oil and gas fields pursuant to the Statement of Financial Accounting Standards No. 121 ("SFAS 121")*fn4 under the Generally Accepted Accounting Principles ("GAAP"). Id. ¶¶ 97-99. According to the Complaint, a confidential witness, identified in the Complaint as an individual who held various financial analysis positions within Exxon USA from 1995 to 1998, and an oil and gas accounting expert will be able to confirm that Exxon had impaired properties in 1998.*fn5 See Compl. ¶¶ 127-137, 167-175. Plaintiffs allege that Exxon, by not reporting the SFAS 121 impairments, maintained its stock value at artificially high levels and thus avoided paying more shares of its stock to Mobil shareholders in the merger. Id. ¶ 250(a). According to Plaintiffs, Exxon should have recognized an impairment of approximately $3.7 billion. Id. ¶ 250(a)(i). Given the stock allocation to Exxon and Mobil shareholders resulting from the merger,*fn6 Plaintiffs allege that Exxon "shortchang[ed] Mobil shareholders" by as much as $18 billion. Pls. Opp. at 24. Alternatively, Plaintiffs claim that if Exxon had taken the impairments and reduced its 1995-1998 net earnings by $3.7 billion, Mobil shareholders would have received an extra 2.3% of the outstanding stock of the combined company.*fn7 Compl. ¶ 250(a)(iv).

  Defendants, on the other hand, assert that Exxon did not have to recognize any impairment of its oil and gas assets because its "disciplined investment and asset management program" regularly reviewed properties and also monitored underperforming assets that the company ultimately "improved to acceptable levels or divested." Defs. Mot. Summ. J. at 10, 30. In its 1998 Annual Report on Form 10-K, Exxon claimed that its asset management program created a "very efficient capital base," which thereby eliminated the need to impair certain of its oil and gas assets in 1998. See Pls. Opp. at 10.

  2. Plaintiffs' securities fraud claims

  Count I of the Complaint asserts a violation of Section 14(a) of the Exchange Act and Rule 14a-9(a) promulgated thereunder. In pertinent part, Section 14(a) states that
[i]t shall be unlawful for any person . . . in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, to solicit . . . any proxy or consent or authorization in respect of any security (other than an exempted security) registered pursuant to Section 781 of the Act. 15 U.S.C. § 78n(a). Rule 14a-9 provides, in relevant part, that
[n]o solicitation . . . shall be made by means of any proxy statement . . . containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading. . . .
17 C.F.R. § 240.14a-9(a). Plaintiffs allege that the Proxy Statement filed in connection with the merger, which contained Exxon's 1998 year-end financial statements, was false and misleading because it "(i) failed to record any SFAS 121 impairment for oil and gas properties . . . (ii) failed to disclose any internal accounting policy that could have explained its failure to report an impairment, as GAAP and SEC Regulations required; and (iii) resulted in a material overstatement of Exxon's net income." Compl. ¶ 235. Because of these omissions and inaccurate financial statements, Plaintiffs claim that Mobil shareholders "did not receive the consideration for their Mobil stock that [D]efendants told them they would get." Id. ¶ 238; see also id. ¶¶ 229-240.

  Count II of the Complaint alleges violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. Section 10(b) makes it unlawful for any person to "use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). Rule 10b-5 renders it illegal to "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made in the light of the circumstances under which they were made, not misleading . . . in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5(b). Section 10(b) and Rule 10b-5 reach "beyond statements and omissions made in a registration statement or prospectus in connection with an initial distribution of securities and create liability for "false or misleading statements or omissions of material fact that affect trading on the secondary market." In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1417 (3d Cir. 1997). In Count II, Plaintiffs advance the same allegations asserted in their Section 14(a) claim and additionally allege that Exxon's three quarterly reports on Form 10-Q filed subsequent to the Proxy Statement and prior to the closing of the merger contained similarly false and misleading statements. Compl. ¶¶ 16, 185-190.

  Count III of the Complaint alleges a violation of Section 20(a) of the Exchange Act by Raymond, Exxon's most senior corporate officer at the time of the merger. Section 20(a) imposes joint and several liability on any person who "controls a person liable under any provision of the [Exchange Act]." Shapiro v. UJB Financial Corp., 964 F.2d 272, 279 (3d Cir. 1992). Under the plain language of the statute, a plaintiff must "prove not only that one person controlled another person, but also that the `controlled person' is liable under the Act. If no controlled person is liable, there can be no controlling person liability." Id. (citation omitted). Section 20(a) is a predicate offense, requiring a violation of some other section of the Exchange Act in order to be applicable. 15 U.S.C. § 78t(a). Here, Plaintiffs allege that Raymond manipulated the value of Exxon stock "to ensure the Mobil acquisition's success." Pls. Opp. at 29-30. According to Plaintiffs, Raymond's "unusually large executive compensation package" is indicative of "heightened motive and opportunity" that satisfies the scienter requirement of a securities fraud claim. Pls. Opp. at 30.

  C. Statute of limitations

  Defendants have moved to dismiss Plaintiffs' securities fraud claims on the ground that they are barred by the statute of limitations. Specifically, Defendants contend that the limitations period governing the Section 14(a) and Section 10(b) claims is one year after the discovery of the alleged wrongdoing or three years from the occurrence of the alleged wrongdoing, whichever period is shorter. See Defs. Mot. Summ. J. at 12. Defendants further assert that Plaintiffs were on inquiry notice of the alleged misstatements when the Proxy Statement was disseminated in April 1999. See id. at 18. Finally, Defendants claim that Plaintiffs have failed to adequately plead scienter. Plaintiffs respond that the appropriate limitations period for their claims is to be found in Section 804 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), and regardless, they were not on inquiry notice of their claims before March 2004. See Pls. Opp. at 7. Furthermore, Plaintiffs assert that their securities fraud claims actually arose on November 30, 1999, when the merger was consummated. Plaintiffs thus contend that their claims were not time-barred prior to Sarbanes-Oxley becoming effective on July 30, 2002.

  II. DISCUSSION

  Federal Rule of Civil Procedure 12(b)(6) provides that a court may dismiss a complaint "for failure to state a claim upon which relief can be granted." A claim should be dismissed only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 215 (3d Cir. 2002) (citations omitted). The inquiry is not whether plaintiff will ultimately prevail, but whether he is entitled to offer evidence to support his claims. Id. (citing Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)). In deciding a Rule 12(b)(6) motion, courts must accept all well-pleaded factual allegations in the complaint as true and draw all reasonable inferences in favor of the non-moving party. Id. (citations omitted). Nevertheless, courts are not required to credit bald assertions or legal conclusions alleged in the complaint. Id. at 216 (citing Burlington Coat, 114 F.3d at 1429). Similarly, legal conclusions draped in the guise of factual allegations do not benefit from the presumption of truthfulness. Id. (citing In re Nice Sys., Ltd. Sec. Litig., 135 F.Supp.2d 551, 565 (D.N.J. 2001)).

  As a general matter, courts ruling on a motion to dismiss may not consider matters extraneous to the complaint. Burlington Coat, 114 F.3d at 1426 (citation omitted). However, an exception to the general rule is that a "`document integral to or explicitly relied upon in the complaint'" may be considered "`without converting the motion [to dismiss] into one for summary judgment.'" Id. (emphasis omitted) (quoting Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1220 (1st Cir. 1996); citing In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 368 n. 9 (3d Cir. 1993) ("a court may consider an undisputedly authentic document that a defendant attaches as an exhibit to a motion to dismiss if the plaintiff's claims are based on the document.")). The rationale underlying this exception is that the primary problem raised by considering documents outside the complaint — lack of notice to the plaintiff — has dissipated where plaintiff has actual notice and has relied upon the documents in framing the complaint. Id. (quotations and citations omitted). For the same reason, courts may consider matters of public record that are relied upon or cited in the complaint. In re Cybershop.com Sec. Litig., 189 F.Supp.2d 214, 223-24 (D.N.J. 2002). Relevant to this action, the Court also may consider SEC filings, even if those filings are not relied on in the complaint. See In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1331 (3d Cir. 2002) ("NAHC").

  A. Applicability of Rule 9(b)

  Independent of the standard applicable to Rule 12(b)(6) motions, Fed.R.Civ.P. 9(b) ("Rule 9(b)") requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). This particularity requirement has been rigorously applied in securities fraud cases. See Burlington Coat, 114 F.3d at 1417. As such, plaintiffs asserting securities fraud claims must specify "`the who, what, when, where, and how: the first paragraph of any newspaper story.'" In re Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999) (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990)). "Although Rule 9(b) falls short of requiring every material detail of the fraud such as date, location, and time, plaintiffs must use `alternative means of injecting ...


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