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Podraza v. Whiting

United States Court of Appeals, Eighth Circuit

June 22, 2015

Thomas Podraza; Dennis Doucet; Jan Arnett; Douglas Keehn, Plaintiffs - Appellants, Patriot Coal Investor Group; Ernesto Espinoza, on behalf of himself and all others similarly situated; John Ziants; James Schmitt; Karel Rybacek; Douglas Combs; Furman Jerry Rogers, III, individually and on behalf of all others similarly situated, Plaintiffs, Kevin Lowery, individually and on behalf of all others similarly situated, Plaintiff - Appellant
v.
Richard M. Whiting; Mark N. Schroeder, Defendants - Appellees, James Karas; Denis Dehne; Cambridge Retirement System; Richard Sitko, Movants

Submitted January 15, 2015.

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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Appeal from United States District Court for the Eastern District of Missouri - St. Louis.

For Thomas Podraza, Dennis Doucet, Jan Arnett, Douglas Keehn, Kevin Lowery, individually and on behalf of all others similarly situated, Plaintiffs - Appellants: David A.P. Brower, Richard H. Weiss, Brower & Piven, New York, NY; Randall Seth Crompton, Eric D. Holland, Holland & Groves, Saint Louis, MO.

For Richard M. Whiting, Mark N. Schroeder, Defendants - Appellees: Glenn Eugene Davis, Lindsay Leible, Hepler & Broom, Saint Louis, MO; Lawrence P. Fogel, Kristen R. Seeger, Hille R. Sheppard, Sidley & Austin, Chicago, IL.

Before WOLLMAN, SMITH, and SHEPHERD, Circuit Judges.

OPINION

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SHEPHERD, Circuit Judge.

This appeal concerns a securities fraud class action brought on behalf of all persons who purchased or acquired Patriot Coal Corporation securities between October 21, 2010, and July 9, 2012 (" Plaintiffs" ). The defendants are Richard Whiting and Mark Schroeder, Patriot's former Chief Executive Officer and former Chief Financial Officer, respectively (" Defendants" ).

In September 2010, a federal district judge in West Virginia ordered Patriot to install environmental remediation facilities at two of its mines. Beginning in October 2010 and continuing until May 2012, for accounting purposes, Patriot recorded the facilities' installation costs as capital expenditures. After corresponding with the Securities and Exchange Commission (" SEC" ) over a period of months about this accounting treatment, however, Patriot restated its financial documents in May 2012 to recognize the installation costs as expenses. The restatement caused Patriot's asset retirement obligation expense and net loss to increase by $49.7 million for 2010 and $23.6 million for 2011. Patriot's share priced dropped after the restatement. The company filed for bankruptcy in July 2012.

Plaintiffs subsequently brought this action, alleging Defendants violated sections 10(b), 20(a), and 20(b) of the Securities Exchange Act of 1934 (" Exchange Act" ), 15 U.S.C. § 78a et seq., as well as SEC Rule 10b--5, 17 C.F.R. § 240.10b--5. Plaintiffs argued Defendants fraudulently capitalized the environmental remediation

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facilities' installation costs to avoid the impact expensing the costs would have on Patriot's bottom line. Defendants moved to dismiss Plaintiffs' complaint under Federal Rule of Civil Procedure 12(b)(6) and the Private Securities Litigation Reform Act of 1995 (" PSLRA" ), 15 U.S.C. § 78u-4. The district court[1] granted the motion to dismiss, finding Plaintiffs failed to meet the PSLRA's heightened requirement for pleading scienter. Plaintiffs now appeal the dismissal of their complaint, arguing the district court's scienter ruling was in error. Because we find the more compelling inference is that Defendants did not act with fraudulent intent, we agree with the district court that the facts alleged do not give rise to the required strong inference of scienter. We affirm.

I.

" Because this appeal arises from the district court's grant of a motion to dismiss, we draw the relevant facts from the class complaint." Elam v. Neidorff, 544 F.3d 921, 925 (8th Cir. 2008). We also consider " other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). Plaintiffs do not dispute that we may consider Patriot's SEC filings and its SEC correspondence to establish what Patriot wrote in those documents.

Patriot is a coal mining company based in St. Louis, Missouri, with chief operations in the central and eastern United States. In 2008, Patriot acquired the Apogee and Hobet surface mines in West Virginia. At the time of the acquisition, the mines were subject to environmental litigation in the Southern District of West Virginia. The plaintiffs in the environmental suits alleged that the mines discharged selenium, a naturally occurring yet potentially toxic element, into water runoff. The selenium discharge levels allegedly exceeded limits set in applicable state mining permits, and the environmental plaintiffs sued to enforce compliance.

Patriot entered consent decrees with the plaintiffs in the environmental suits in March 2009, agreeing to bring the Apogee and Hobet mines into compliance with specific selenium discharge levels by April 2010. As part of its subsequent effort to reduce selenium discharge levels at the mines, Patriot installed water treatment technology it refers to as Zero Valent Iron (" ZVI" ). Patriot recorded all the costs associated with the ZVI technology, which amounted to about $20 million, as expenses.

In September 2010, however, because the ZVI technology proved ineffective in sufficiently lowering the selenium discharge levels, the West Virginia district court ordered Patriot to install a Fluidized Bed Reactor (" FBR" ) facility at the Apogee mine and to submit and implement a treatment plan for the Hobet mine. After evaluating several alternative technologies, Patriot proposed to install an Advanced Biological Metals (" ABMet" ) facility at the Hobet mine. We follow the parties and the district court in referring to ...


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