UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF … · in re key energy services, inc. ) c.a. no. 4:14-cv-2368 securities litigation ) ) ) motion to dismiss plaintiff’s consolidated

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

) ) IN RE KEY ENERGY SERVICES, INC. ) C.A. No. 4:14-cv-2368 SECURITIES LITIGATION ) ) )

MOTION TO DISMISS PLAINTIFF’S CONSOLIDATED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

Case 4:14-cv-02368 Document 49 Filed in TXSD on 04/14/15 Page 1 of 51

TABLE OF CONTENTS

TABLE OF AUTHORITIES ......................................................................................................... iv

I. INTRODUCTION AND SUMMARY OF ARGUMENT ................................................. 1

II. BACKGROUND FACTS AND THE CAC’S ALLEGATIONS ....................................... 3

A. Key was transparent about its business in Mexico, including the importance of its relationship with PEMEX. ................................................................................. 4

B. Key accurately disclosed its operations in Russia, which were small and limited to its ownership interest in one venture. ................................................................. 7

C. The potential for FCPA compliance issues was a primary risk factor that Key disclosed. ................................................................................................................. 8

D. The alleged misrepresentations challenged in the CAC. ...................................... 10

III. LEGAL STANDARD FOR DISMISSAL OF SECURITIES FRAUD CASES .............. 10

IV. ARGUMENT AND AUTHORITIES ............................................................................... 13

A. The CAC fails to plead falsity with sufficient particularity. ................................. 13

1. Key’s Code of Business Conduct and FCPA Compliance Manual are not actionable misstatements. ................................................................... 13

2. The CAC contains no particularized facts supporting Plaintiff’s allegation that Defendants failed to disclose that FCPA violations were responsible for Key’s growth in Mexico and Russia. ...................... 19

3. The CAC contains no particularized facts indicating that Defendants failed to disclose other problems with Key’s business in Mexico. ........... 22

4. Alario and Whichard’s SOX Certifications are inactionable. ................... 25

B. The CAC does not plead particularized facts giving rise to a strong inference of scienter. ............................................................................................................. 26

1. With no allegations of apparent motive to commit securities fraud, Plaintiff fails to meet its burden of pleading specific circumstantial evidence that any individual acted with the requisite scienter. ................. 27

2. The ongoing FCPA investigations do not strengthen the inference of scienter. ..................................................................................................... 29

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3. Key’s internal controls do not give rise to any inference of scienter, much less a strong one. ............................................................................. 32

4. The CAC’s allegations regarding the Individual Defendants’ executive positions and roles within the Company do not give rise to a strong inference of scienter. ................................................................................. 33

5. The confidential witness allegations add nothing to the scienter analysis.36

C. The CAC fails to adequately plead loss causation. ............................................... 38

D. The CAC’s Section 20(a) claims also must be dismissed..................................... 40

V. CONCLUSION ................................................................................................................. 41

CERTIFICATE OF SERVICE ..................................................................................................... 43

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TABLE OF AUTHORITIES

Page(s) CASES

ABC Arbitrage Pls. Grp. v. Tchuruk, 291 F.3d 336 (5th Cir. 2002) ...................................................................................................12

Abrams v. Baker Hughes Inc., 292 F.3d 424 (5th Cir. 2002) ...............................................................27, 28, 29, 33, 34, 35, 37

Andropolis v. Red Robin Gourmet Burgers, Inc., 505 F. Supp. 2d 662 (D. Colo. 2007) .......................................................................................16

Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., 597 F.3d 330 (5th Cir. 2010) .............................................................................................38, 39

Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., No. 3:02-CV-1152-M, 2008 WL 4791492 (N.D. Tex. Nov. 4, 2008) .....................................18

Ashcroft v. Iqbal, 556 U.S. 662 (2009) ...........................................................................................................10, 11

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) .................................................................................................................11

Cement & Concrete Workers Dist. Council Pension Fund v. Hewlett Packard Co., 964 F. Supp. 2d 1128 (N.D. Cal. 2013) ...................................................................................16

Cent. Laborers’ Pension Fund v. Integrated Elec. Servs., Inc., 497 F.3d 546 (5th Cir. 2007) ...................................................................................................29

City of Brockton Retirement System v. Avon Products, Inc. No. 11-cv-4665 PGG, 2014 WL 4832321 (S.D.N.Y. Sept. 29, 2014) ..................15, 18, 21, 31

City of Roseville Emps.’ Ret. Sys. v. Horizon Lines, Inc., 686 F. Supp. 2d 404, 415 (D. Del. 2009) ...........................................................................16, 25

Collin v. Morgan Stanley Dean Witter, 224 F.3d 496 (5th Cir. 2000) .....................................................................................................3

Collmer v. U.S. Liquids, Inc., 268 F. Supp. 2d 718 (S.D. Tex. 2003) .....................................................................................35

Daniels v. Farmers Elevator & Exch. Co. of Monroe City, No. 205 CV 55 DDN, 2006 WL 2632207 (E.D. Mo. Sept. 13, 2006).......................................8

Dawes v. Imperial Sugar Co., 975 F. Supp. 2d 666 (S.D. Tex. 2013) .....................................................................................34

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Desai v. Gen. Growth Props., Inc., 654 F. Supp. 2d 836 (N.D. Ill. 2009) .......................................................................................16

Dobina v. Weatherford Int’l Ltd., 909 F. Supp. 2d 228 (S.D.N.Y. 2012)......................................................................................32

Elam v. Neidorff, 544 F.3d 921 (8th Cir. 2008) ...................................................................................................35

Fin. Acquisition Partners, LP v. Blackwell, 440 F.3d 278 (5th Cir. 2006) .....................................................................................................3

Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200 (5th Cir. 2009) .............................................................................................29, 33

Garfield v. NDC Health Corp., 466 F.3d 1255 (11th Cir. 2006) ...............................................................................................26

Goldstein v. MCI WorldCom, 340 F.3d 238 (5th Cir. 2003) ...................................................................................................29

Greenberg v. Crossroads Sys., Inc., 364 F.3d 657 (5th Cir. 2004) .............................................................................................18, 40

Hall v. Variable Annuity Life Ins. Co., 727 F.3d 372 (5th Cir. 2013) ...................................................................................................18

Hershey v. Energy Transfer Partners, L.P., 610 F.3d 239 (5th Cir. 2010) ...................................................................................................10

In re Accuray, Inc. Sec. Litig., 757 F. Supp. 2d 936 (N.D. Cal. 2010) .....................................................................................36

In re Alamosa Holdings, Inc., 382 F. Supp. 2d 832 (N.D. Tex. 2005) ....................................................................................24

In re Anadarko Petrol. Corp. Class Action Litig., 957 F. Supp. 2d 806 (S.D. Tex. 2013) ...............................................................................24, 35

In re Azurix Corp. Sec. Litig., 198 F. Supp. 2d 862 (S.D. Tex. 2002) .....................................................................................33

In re Blockbuster Inc. Sec. Litig., No. 3:03-CV-0398-M, 2004 WL 884308 (N.D. Tex. Apr. 26, 2004) .....................................20

In re China Valves Tech. Sec. Litig., 11 CIV. 0796 LAK, 2012 WL 4039852 (S.D.N.Y. Sept. 12, 2012)..................................21, 30

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In re Dell Inc., Sec. Litig., 591 F. Supp. 2d 877 (W.D. Tex. 2008)........................................................................28, 38, 40

In re Franklin Bank Corp. Sec. Litig., 782 F. Supp. 2d 364 (S.D. Tex. 2011) ...............................................................................14, 26

In re Intelligroup Sec. Litig., 527 F. Supp. 2d 262 (D.N.J. 2007) ..........................................................................................17

In re Invision Techs., Inc. Sec. Litig., No. C-04-3181 MJJ, 2006 WL 538752 (N.D. Cal. Jan. 24, 2006) ..........................................25

In re Michaels Stores, Inc. Sec. Litig., No. 3:03-CV-0246, 2004 WL 2851782 (N.D. Tex. Dec. 10, 2004) ........................................26

In re Odyssey Healthcare, Inc. Sec. Litig., 424 F. Supp. 2d 880 (N.D. Tex. 2005) ....................................................................................30

In re YUM! Brands, Inc. Sec. Litig., No. 3:13-cv-00463-CRS, 2014 WL 7359168 (W.D. Ky. Dec. 24, 2014) ...............................16

Ind. Elec. Workers’ Pension Trust Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527 (5th Cir. 2008) .....................................................................10, 18, 26, 29, 37, 41

Local 210 Unity Pension & Welfare Funds v. McDermott Int’l Inc., No. 4:13-CV-2393, 2015 WL 1143081 (S.D. Tex. Mar. 13, 2015) ........................................23

Loos v. Immersion Corp., 762 F.3d 880 (9th Cir. 2014) ...................................................................................................39

Lormand v. US Unwired, Inc., 565 F.3d 228 (5th Cir. 2009) .............................................................................................24, 38

Lovelace v. Software Spectrum, Inc., 78 F.3d 1015 (5th Cir. 1996) ...................................................................................................12

Magruder v. Halliburton Co., No. 3:05-CV-1156-M, 2009 WL 854656 (N.D. Tex. Mar. 31, 2009) .....................................40

Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172 (4th Cir. 2009) .....................................................................................................8

McCasland v. FormFactor, Inc., No. 07-cv-5545 SI, 2008 WL 2951275 (N.D. Cal. July 25, 2008) ..........................................36

Meyer v. Greene, 710 F.3d 1189 (11th Cir. 2013) ...................................................................................21, 30, 39

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Midwestern Teamsters Pension Trust Fund v. Baker Hughes Inc., Civ. A. H-08-1809, 2009 WL 6799492 (S.D. Tex. May 7, 2009) ...........................................32

Montano-Valdez v. Wells Fargo Bank, –No. H-13-3078, 2014 WL 69886 (S.D. Tex. Jan. 8, 2014) ......................................................3

Montoya v. FedEx Ground Package Sys., Inc., 614 F.3d 145 (5th Cir. 2010) ...................................................................................................11

Nathanson v. Polycom, Inc., No. 13-cv-3476 SC, 2015 WL 1517777 (N.D. Cal. Apr. 3, 2015) ..........................................15

Nathenson v. Zonagen Inc., 267 F.3d 400 (5th Cir. 2001) ...........................................................................11, 13, 27, 33, 34

Pipefitters Local No. 636 Defined Benefit Plan v. Zale Corp., 499 F. App’x 345 (5th Cir. 2012) ............................................................................................29

Pub. Emps.’ Ret. Sys. of Miss., P.R. Teachers Ret. Sys. v. Amedisys, Inc., 769 F.3d 313 (5th Cir. 2014) ...................................................................................................39

R2 Invs. LDC v. Phillips, 401 F.3d 638 (5th Cir. 2005) .................................................................................11, 12, 28, 29

Rosenzweig v. Azurix Corp., 332 F.3d 854 (5th Cir. 2003) .................................................................................20, 24, 29, 35

Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353 (5th Cir. 2004) ...............................................................12, 13, 14, 20, 23, 27, 28

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) ...........................................................................................................11, 13

Thompson v. RelationServe Media, Inc., 610 F.3d 628 (11th Cir. 2010) .................................................................................................30

Tuchman v. DSC Comm’ns Corp., 14 F.3d 1061 (5th Cir. 1994) ...................................................................................................28

Tyler v. Liz Claiborne, Inc., 814 F. Supp. 2d 323 (S.D.N.Y. 2011)......................................................................................36

United States v. Kay, 359 F.3d 738 (5th Cir. 2004) ...................................................................................................22

Wolfe v. Aspenbio Pharma, Inc., 587 F. App’x 493 (10th Cir. 2014) ..........................................................................................30

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Woodward v. Raymond James Fin., Inc., 732 F. Supp. 2d 425 (S.D.N.Y. 2010)......................................................................................14

Zucco Partners, LLC v. Digimarc Corp., 445 F. Supp. 2d 1201 (D. Or. 2006) ........................................................................................17

Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) ...................................................................................................26

STATUTES

15 U.S.C. § 78u-4(b)(1) (2012) .....................................................................................................12

15 U.S.C. § 78u-4(b)(1)-(2) ...........................................................................................................12

15 U.S.C. § 78u-4(b)(2) .................................................................................................................26

OTHER AUTHORITIES

Federal Rules of Civil Procedure 9(b) ...........................................................................................10

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Defendants Key Energy Services, Inc. (“Key” or the “Company”), Richard J.

Alario, J. Marshall Dodson, and Newton W. “Trey” Wilson III (together with Taylor M. “Trey”

Whichard III, the “Individual Defendants,” and collectively with Key, “Defendants”) file this

Motion to Dismiss Plaintiff’s Consolidated Amended Complaint (the “CAC”) pursuant to

Federal Rules of Civil Procedure 9(b) and 12(b)(6).

I. INTRODUCTION AND SUMMARY OF ARGUMENT

Plaintiff’s 108-page CAC demonstrates that volume is no substitute for substance,

as it fails to contain particularized allegations of the type required by innumerable cases to

survive a motion to dismiss under the Private Securities Litigation Reform Act of 1995 (the

“PSLRA”). The CAC’s central thesis is that because Key has disclosed ongoing investigations

of possible violations of the Foreign Corrupt Practices Act (“FCPA”) in its Mexican and Russian

operations, (1) statements in the Company’s Code of Business Conduct and FCPA Compliance

Manual must have been false, (2) FCPA violations must have occurred, (3) those violations must

have fueled the Company’s expansion in Mexico and Russia, and (4) the Individual Defendants

must have known about those violations. But these types of unsupported inferences do not come

close to meeting the PSLRA’s heightened pleading standards for a Rule 10b-5 complaint, and the

CAC must be dismissed for multiple independent reasons.

First, the CAC fails to allege falsity with particularity as required by the PSLRA.

As a threshold matter, the CAC cannot point to a single statement made by Defendants that is

potentially actionable under Rule 10b-5. Defendants never said that there would never be a

possible FCPA issue or problem; to the contrary, the Company repeatedly warned investors of

the risks of an FCPA violation, and that the Company’s FCPA compliance depended on the

success of its ongoing compliance program and the efforts of its employees, agents, affiliates,

and business partners. Having nothing else to point to, the CAC repeatedly cites to certain

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statements in the Company’s Code of Business Conduct and FCPA Compliance Manual as the

basis for this suit. But courts consistently recognize that statements in company manuals are not

the type of statements on which reasonable investors rely; rather, they are immaterial puffery.

The CAC also alleges that various statements concerning Key’s business and prospects in

Mexico and Russia were false and misleading because the Company failed to disclose that

growth there was fueled by FCPA violations, but the CAC contains no allegations, much less

particularized allegations as required by the PSLRA, that FCPA violations in fact occurred or

were the cause of Key’s growth.

Second, the CAC fails to raise a strong inference of scienter. Conspicuously

absent from the CAC are any allegations even hinting that Defendants had any motive to commit

securities fraud—there is no allegation that any Defendant sold stock during the class period,

much less at unusual times and at unusual prices, nor any allegation that Key used its stock as

currency to buy other companies. Equally missing from the CAC are particularized allegations

establishing that anything said by any Individual Defendant was known to be false by that person

at that time. The CAC relies heavily on the allegations of so-called “confidential witnesses”

(“CWs”), but those stand for nothing more than the CWs’ opinions that Key’s internal FCPA

controls were inadequate, and cases uniformly recognize that these types of allegations add

nothing to the scienter analysis. That leaves the CAC with the naked inference that because the

Company is investigating possible FCPA violations, FCPA violations must have occurred, and

the Individual Defendants must have known of those violations at the time of the statements at

issue. But that type of “scienter by inference” argument is rejected time and again by the courts.

Moreover, the CAC’s own allegations are at war with each other; the crux of the CAC’s falsity

allegations is that Key falsely represented that its FCPA controls were strong when they were

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not; yet, the CAC’s central claim as to scienter is that the Individual Defendants must have

known of the FCPA violations because a well-functioning FCPA compliance system would have

detected and reported those violations up the corporate ladder. Rather than giving rise to a

strong inference that the Individual Defendants acted with scienter, the CAC gives rise to a much

stronger inference that to the extent that Key had FCPA issues, the Individual Defendants were

unaware of them.

Finally, the CAC does not adequately plead that the alleged misrepresentations

proximately caused the purported stock price inflation. The two stock price drops that occurred

after the “truth” concerning Key’s business in Russia and Mexico emerged were not the result of

corrective disclosures for at least two reasons. First, the FCPA-related investigations are not, by

themselves, corrective disclosures as a matter of law. Second, the disconnect between these

disclosures and the alleged fraudulent misrepresentations precludes a finding that the disclosures

were corrective in nature. Accordingly, Plaintiff does not adequately plead loss causation, and

this pleading failure provides an additional ground for dismissal.

II. BACKGROUND FACTS AND THE CAC’S ALLEGATIONS

Key is a well-servicing contractor that focuses on completing, maintaining, and

retiring wells. See Ex. 1, Feb. 25, 2014 Form 10-K at 4.1 Its specific services include the

1 “Documents that a defendant attaches to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff’s complaint and are central to her claim.” Collin v. Morgan Stanley Dean Witter, 224 F.3d 496, 498–99 (5th Cir. 2000) (internal quotation marks omitted). As such, the Court may consider “‘the full text of documents that are partially quoted or referred to in the complaint’” without converting the motion into one for summary judgment. Montano-Valdez v. Wells Fargo Bank, –No. H-13-3078, 2014 WL 69886, at *1 (S.D. Tex. Jan. 8, 2014) (quoting In re Sec. Litig. BMC Software, Inc., 183 F. Supp. 2d 860, 882 (S.D. Tex. 2001)); accord Fin. Acquisition Partners, LP v. Blackwell, 440 F.3d 278, 286 (5th Cir. 2006) (“[I]n securities actions, the court may, as did the district court here, rely on public disclosure documents required by law to be, and that have been, filed with the SEC, and documents that the plaintiffs either possessed or knew about and upon which they relied in bringing the suit, without, pursuant to Rule 12(b), converting the motion into one for summary judgment.”) (internal quotation marks omitted).

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completion of newly drilled wells, workover and recompletion of existing oil and natural gas

wells, well maintenance, and the plugging and abandonment of wells. Id. Many of Key’s rigs

are additionally outfitted with KeyView® technology, which captures well site operating data,

provides safety control systems, and allows for better monitoring capabilities. Id.

Key operates in the United States, Mexico, Colombia, Ecuador, the Middle East,

and Russia. Id. In addition, Key has a “technology development and control systems business

based in Canada.” Id. at 4. In Mexico, Key provides rig-based services as well as drilling,

coiled tubing, wireline and project management, and consulting services. Id. at 5. In Russia,

Key supplements its rig-based services with drilling and reservoir engineering services. Id. at 5–

6.

A. Key was transparent about its business in Mexico, including the importance of its relationship with PEMEX.

Before and throughout the class period, which runs from September 4, 2012 to

July 17, 2014, Key was transparent that its activities in Mexico—and its successes—depended

heavily on the needs and capabilities of Petróleos Mexicanos (“PEMEX”), Mexico’s national oil

company. In 2009, Key reported that PEMEX accounted for approximately 11% of Key’s

revenues and represented approximately 25% of Key’s outstanding account receivables. See

Ex. 2, Feb. 26, 2010 Form 10-K at 7; Ex. 3, Feb. 25, 2011 Form 10-K at 7. Key also identified

its reliance on PEMEX as a “Risk Factor” in its Form 10-K for the year. See Ex. 2, Feb. 26,

2010 Form 10-K at 15. In 2010, PEMEX’s budget was cut, and Key’s activities in the region

decreased. See Ex. 3, Feb. 25, 2011 Form 10-K at 26–27, 32. Conversely, in 2011, Key saw a

“significant activity increase in Mexico,” see Ex. 4, Feb. 29, 2012 Form 10-K at 34, and

“generate[d] significant revenue from [its] contracts with the Mexican national oil company,” id.

at 6.

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Key similarly disclosed PEMEX’s important role during the class period. At a

conference in September 2012, Key’s Chairman, President, and Chief Executive Officer,

Defendant Alario, described PEMEX as the “core” of Key’s Mexican business. See CAC ¶ 159.

In the Form 10-K filed for 2012, Key again identified its dependence on PEMEX as a “Risk

Factor,” see Ex. 5, Feb. 25, 2013 Form 10-K at 13, 54, and reported that PEMEX accounted for

12% of consolidated revenue and 31% of Key’s account receivables, id. at 6. As Key disclosed,

however, its operations in Mexico were not as successful in 2012 as they had been the previous

year. Because of “anticipated activity growth in Mexico that did not occur,” Key reported a

decrease in business during the final quarter of 2012. Ex. 6, Feb. 14, 2013 Press Release at 2;

see also CAC ¶ 173. Having previously rebounded exceptionally well from a similar slump in

activity in 2011, however, Key expressed optimism that PEMEX would overcome its budget

woes and that Key’s business would recover accordingly. See Ex. 7, Feb. 15, 2013 Earnings Call

Tr. at 2; see also CAC ¶ 173. Nevertheless, Key reiterated the need to “diversify the type of

work we do, who we do it for and where we do it” so as to help liberate its business in Mexico

from the rise and fall of the PEMEX tide. Id. at 4.

Unfortunately, Key’s optimism did not come to fruition. In April 2013, Key

reported a 13% decrease in revenue, attributable primarily to the “lower-than-anticipated activity

in Mexico.” See Ex. 8, Apr. 26, 2013 Earnings Call Tr. at 2–3; see also CAC ¶ 184. Key

explained that its “principal customer [was] significantly reducing its spending in the North

region, including the ATG asset where [Key] operate[s].” Ex. 8, Apr. 26, 2013 Earnings Call Tr.

at 2. Mexican operations continued to be “burdened by the low activity levels associated with

internal budgetary issues at PEMEX related to 2012 budget overspend” into November 2013,

when PEMEX announced further decreases. See Ex. 9, Nov. 1, 2013 Form 10-Q at 34, 36, 38–

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39. PEMEX reduced spending in the Northern region where Key primarily operated, and Key

started to shift its focus to operations in other regions. See id. at 11, 37, 39; see also Ex. 10, May

3, 2013 Form 10-Q at 30; Ex. 11, July 26, 2013 Earnings Call Tr. at 2, 7; Ex. 12, Aug. 2, 2013

Form 10-Q at 37. By October, Key reported that it had “begun to seriously deconcentrate [its]

dependence on PEMEX’s North Region budget.” Ex. 13, Oct. 31, 2013 Earnings Call Tr. at 5.

But again, because the revenue losses in the North were due to PEMEX having spent its 2013

budget by the end of 2012, as opposed to a loss of business to competitors, Key remained

optimistic that the slowdown was isolated and that activity would resume once PEMEX’s

budgetary issues were resolved. See Ex. 8, Apr. 26, 2013 Earnings Call Tr. at 4; Ex. 13, Oct. 31,

2013 Earnings Call Tr. at 5.

Then, on January 6, 2014, Key disclosed that it expected to take a charge of

between $2 million and $3 million in the fourth quarter of 2013 in connection with an audit of

the Company’s billings under its contracts with PEMEX. See Ex. 14, Jan. 6, 2014 Press Release

at 1 (“PEMEX is conducting an audit of the Company’s aggregate billings of $372 million under

its contracts with PEMEX. As a result, the Company expects to take a charge of between $2

million and $3 million in the fourth quarter 2013.”); see also CAC ¶ 204. Key further disclosed

the impact of the charge on its overall business. Ex. 15, Feb. 13, 2014 Press Release at 2

(reporting that “[f]ourth quarter 2013 international revenues were” down 14.5% and that

“income margins were adversely impacted by . . . the downsizing of our Mexico operations and

by a $3.2 million pre tax charge associated with the previously disclosed audit by PEMEX”); see

also CAC ¶ 204.

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B. Key accurately disclosed its operations in Russia, which were small and limited to its ownership interest in one venture.

Key’s operations in Russia were never a major focus of its international growth

strategy. As Alario explained, “Russia is a small market for Key. Our strategy there was to get

our toe in the water.” Ex. 7, Feb. 15, 2013 Earnings Call Tr. at 9; see also CAC ¶ 161 (alleging

that Defendant Alario stated during a September 2012 investors conference that Key does not

“think of Russia ever being the biggest place that [it has] an investment outside the U.S.”); CAC

¶ 174. Key’s Russian operations essentially consisted of an ownership interest in OOO

Geostream Services Group (“Geostream”), “a drilling and workover services and sub-surface

engineering and modeling company . . . .” See Ex. 2, Feb. 26, 2010 Form 10-K at 8, 43. Key

initially held only a 26% interest in the Geostream joint venture, but it increased its holding to

50% in March 2009. Id. at 8, 43–44, 63; see also CAC ¶¶ 46, 48. On April 9, 2013, Key

exercised its option to acquire the remaining 50% ownership of Geostream for $14.6 million.

See Ex. 10, May 3, 2013 Form 10-Q at 28; see also CAC ¶ 55.

For several years, Key’s business in Russia stayed on a generally positive track.

As Key representatives reported in April 2013, “[o]ver the past couple of years, we have tested

and evaluated the market in Russia and have learned a great deal. . . . And we believe that there

are further market opportunities for the reliable and efficient services Key provides.” Ex. 8, Apr.

26, 2013 Earnings Call Tr. at 4. Key later reported that it was satisfied with the progress it was

making in the region following this acquisition. See Ex. 11, July 26, 2013 Earnings Call Tr. at

8–9; see also CAC ¶ 194. By February 2014, Key stated that it was already seeing results from

Geostream’s transition into a wholly owned subsidiary and reported a slight profit in Russia for

the quarter. See Ex. 16, Feb. 14, 2014 Earnings Call Tr. at 3, 10; see also CAC ¶ 208.

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Unfortunately, political instability in the region began to threaten Key’s

operations later that year. See Ex. 17, May 6, 2014 Form 10-Q at 34. Furthermore, in July 2014,

Key disclosed that it expected “to record a $30 million to $35 million pre-tax charge for goodwill

and other asset impairments related to its operations in Russia.” Ex. 18, July 17, 2014 Press

Release at 1; see also CAC ¶ 223.2

C. The potential for FCPA compliance issues was a primary risk factor that Key disclosed.

One hazard of conducting business abroad—which Key explicitly and repeatedly

disclosed as a “Risk Factor” to investors—is the inability to guarantee FCPA compliance and the

risks associated with FCPA violations. As Key repeatedly disclosed,

[o]ur failure to comply with the Foreign Corrupt Practices Act (“FCPA”) and similar laws would have a negative impact on our ongoing operations.

Our ability to comply with the FCPA and similar laws is dependent on the success of our ongoing compliance program, including our ability to continue to manage our agents, affiliates and business partners, and supervise, train and retain competent employees. Our compliance program is also dependent on the efforts of our employees to comply with applicable law and our Business Code of Conduct. We could be subject to sanctions and civil and

2 When the purchase price of a company or an asset (such as Geostream) exceeds the book value of its assets, the difference is recorded as goodwill, an intangible asset that is not amortized or depreciated under GAAP. See Ex. 25, GOODWILL AND OTHER INTANGIBLE ASSETS, Statement of Fin. Accounting Standards No. 142, Summary at 6 & ¶ 35 (Fin. Accounting Standards Bd. 2001); Daniels v. Farmers Elevator & Exch. Co. of Monroe City, No. 205 CV 55 DDN, 2006 WL 2632207, at *7 (E.D. Mo. Sept. 13, 2006) (defining goodwill as the “excess of the purchase price of a company over its book value,” which is an “intangible asset for accounting purposes”). But going forward, “[g]oodwill must ‘be tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of a reporting unit. This first step is a screen for potential impairment, and the second step measures the amount of impairment, if any.’” Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 190 (4th Cir. 2009) (quoting Goodwill and Other Intangible Assets, Statement of Fin. Accounting Standards No. 142, Summary (Fin. Accounting Standards Bd. 2001) (J.A. 1992)). Key tested its Russian reporting unit every year from 2010 to 2013 and consistently found that the fair value of the unit exceeded the carrying value. See Ex. 3, Feb. 25, 2011 Form 10-K at 45, 80; Ex. 4, Feb. 29, 2012 Form 10-K at 46; Ex. 5, Feb. 25, 2013 Form 10-K at 41; Ex. 1, Feb. 25, 2014 Form 10-K at 41. June 2014 is the first time that Key found that impairment had occurred and calculated a corresponding charge. Notably, Plaintiff does not allege that Key was required to take an impairment charge any sooner than it did.

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criminal prosecution as well as fines and penalties in the event of a finding of violation of the FCPA or similar laws by us or any of our employees.

Ex. 5, Feb. 25, 2013 Form 10-K at 16; Ex. 1, Feb. 25, 2014 Form 10-K at 17. Key had protected

against these risks by adopting a Code of Business Conduct and an FCPA Compliance Manual

that informed employees of their obligations under the FCPA and set forth procedures for

employees to follow. See CAC ¶¶ 94–114. However, Key never guaranteed that such measures

would prevent any and all violations. To the contrary, Key warned that despite these internal

control measures, violations of the FCPA remained an attendant risk of conducting business

abroad. See, e.g., Ex. 5, Feb. 25, 2013 Form 10-K at 16. Key repeated this warning throughout

the class period. See, e.g., Ex. 19, Oct. 30, 2013 Press Release at 10–11; Ex. 14, Jan. 6, 2014

Press Release at 2–3; Ex. 1 Feb. 25, 2014 Form 10-K at 17.

Unfortunately, these risks threatened to materialize in 2014. On May 6, 2014,

Key reported that the SEC had initiated an investigation into possible FCPA violations

concerning Key’s business in Russia. See Ex. 17, May 6, 2014 Form 10-Q at 33. In a Form 8-K

filed on June 4, 2014, Key additionally disclosed that it had become aware of potential FCPA

violations in Mexico. See Ex. 20, June 4, 2014 Form 8-K. Key further stated that it had initiated

an internal investigation into these matters, hired independent outside counsel to continue these

investigations, and self-reported to the SEC and the DOJ. Id. And, in a July 17, 2014 press

release, Key disclosed that it had incurred approximately $5 million in costs in connection with

the aforementioned FCPA investigations. Ex. 18, July 17, 2014 Press Release at 1.3

3 The CAC further alleges that in November 2014, Key disclosed that its internal investigations “‘include[d] a review of certain aspects of the Company’s operations in Colombia.’” CAC ¶ 151 (quoting Nov. 3, 2014 Form 10-Q at 26) (alteration in original); see also id. ¶¶ 133, 227. As the CAC itself acknowledges, however, this announcement occurred after the class period. Id. ¶ 156. Accordingly, it is irrelevant for purposes of analyzing the allegations in the CAC and this motion.

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D. The alleged misrepresentations challenged in the CAC.

In the CAC, Plaintiff alleges that Defendants made numerous false and

misleading statements during the class period. These statements fall into four broad categories:

(1) statements in the Company’s Code of Business Conduct and FCPA Compliance Manual,

which allegedly failed to disclose that Key had deficient internal controls; (2) statements

concerning Key’s business in Mexico and Russia, which allegedly fraudulently omitted that

Key’s growth and growth strategy in those markets were largely attributable to FCPA violations;

(3) statements that allegedly falsely portrayed Key’s business in Mexico; and (4) statements in

and certifications accompanying Key’s SEC filings, which allegedly falsely omitted internal

control deficiencies and FCPA violations at Key. According to Plaintiff, these statements

constitute violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange

Act”) and Rule 10b-5 promulgated thereunder.

III. LEGAL STANDARD FOR DISMISSAL OF SECURITIES FRAUD CASES

To state a securities fraud claim under Section 10(b) and Rule 10b-5, Plaintiff

must plead: (1) a material misrepresentation or omission; (2) a defendant acting with scienter

concerning the fraud; (3) reliance; (4) damages; and (5) loss causation. See Ind. Elec. Workers’

Pension Trust Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527, 532 (5th Cir. 2008). To survive

dismissal, Plaintiff’s CAC must meet not only the threshold requirements of Federal Rule of

Civil Procedure 12(b)(6) but also the heightened pleading standards of Rule 9(b) and the

PSLRA.

A motion to dismiss under Rule 12(b)(6) tests whether the plaintiff has pleaded

sufficient facts to “state a claim to relief that is plausible on its face.” Hershey v. Energy

Transfer Partners, L.P., 610 F.3d 239, 245 (5th Cir. 2010) (quoting Ashcroft v. Iqbal, 556 U.S.

662, 678 (2009)). Claims have “facial plausibility” only when “the plaintiff pleads factual

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content that allows the court to draw the reasonable inference that the defendant is liable for the

misconduct alleged.” Iqbal, 556 U.S. at 678; accord Montoya v. FedEx Ground Package Sys.,

Inc., 614 F.3d 145, 148 (5th Cir. 2010). Following this precept, the Fifth Circuit has cautioned

that while properly pleaded material allegations in the complaint are accepted as true for

purposes of the motion, the Court should not “strain to find inferences favorable to the plaintiffs

and [should] not accept conclusory allegations, unwarranted deductions, or legal conclusions.”

R2 Invs. LDC v. Phillips, 401 F.3d 638, 642 (5th Cir. 2005) (internal quotation marks omitted).

The Supreme Court has further admonished that “a plaintiff’s obligation to provide the grounds

of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation

of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555

(2007) (internal quotation marks omitted).

A case brought under Section 10(b) and Rule 10b-5 also must satisfy the

heightened pleading standards of Rule 9(b) and the PSLRA. See Tellabs, Inc. v. Makor Issues &

Rights, Ltd., 551 U.S. 308, 322–24 (2007). Rule 9(b) requires that the complaint state “with

particularity the circumstances constituting fraud.” FED. R. CIV. P. 9(b). The PSLRA further

enhances the “particularity” requirement for pleading securities fraud under Rule 9(b). Enacted

in 1995 in response to frustration with Rule 9(b)’s inability “to prevent abusive, frivolous strike

suits,” the goal of the PSLRA was to “prevent the abuse of federal securities laws by private

plaintiffs.” See Nathenson v. Zonagen Inc., 267 F.3d 400, 406–07 (5th Cir. 2001) (citing H.R.

Conf. Rep. No. 104-369, at 41 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 740).

To encourage the dismissal of non-meritorious securities cases, the PSLRA

enhances the pleading requirement in two ways. First, the PSLRA requires not only that a

plaintiff specify each allegedly false or misleading statement or omission, but also that the

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plaintiff specify “the reason or reasons why the statement is misleading, and, if an allegation

regarding the statement or omission is made on information and belief,” the complaint must also

“state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1)

(2012); see, e.g., Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 362 (5th Cir.

2004) (“The PSLRA reinforces the particularity requirements of Rule 9(b), requiring the

plaintiffs to state not only the time, place, the identity of the speaker, and the content of the

alleged misrepresentation, but also to explain why the challenged statement or omission is false

or misleading.”). Because the allegations in the CAC are not made on the basis of Plaintiff’s

personal knowledge, they are necessarily made on information and belief, thereby triggering the

PSLRA’s requirement that a sufficient factual basis be alleged to support a claim that a statement

was false when made. ABC Arbitrage Pls. Grp. v. Tchuruk, 291 F.3d 336, 351 (5th Cir. 2002).

If the CAC does not “plead with particularity sufficient facts to support” an allegation that a

statement was false when made, it must be dismissed. Id. at 353 (emphasis and internal

quotation marks omitted).

Second, the PSLRA requires, for each properly alleged misrepresentation or

omission, that a plaintiff state with particularity facts giving rise to a strong inference that the

defendants acted with scienter. See 15 U.S.C. § 78u-4(b)(1)-(2); see also R2 Invs., 401 F.3d at

642, 645 (observing that only strong inferences of scienter, not those based on conclusory

allegations or unwarranted deductions, survive a motion to dismiss). The Fifth Circuit defines

scienter as “a mental state embracing intent to deceive, manipulate, or defraud.” Lovelace v.

Software Spectrum, Inc., 78 F.3d 1015, 1018 (5th Cir. 1996) (internal quotation marks omitted).

Severe recklessness can satisfy the scienter requirement but is “limited to those highly

unreasonable omissions or misrepresentations that involve not merely simple or even

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inexcusable negligence, but an extreme departure from the standards of ordinary care.”

Nathenson, 267 F.3d at 408–09 (internal quotation marks omitted). The “strong inference” of

scienter necessary to survive a motion to dismiss requires the court to conclude that the inference

of scienter is more than plausible or reasonable—it must be cogent and at least as strong as any

opposing inference that could be drawn from the facts alleged. See Tellabs, 551 U.S. at 323–24.

IV. ARGUMENT AND AUTHORITIES

A. The CAC fails to plead falsity with sufficient particularity.

Mistaking quantity for quality, Plaintiff challenges numerous statements from

twenty distinct sources—including Key’s Code of Business Conduct, FCPA Compliance

Manual, press releases, SEC filings, earnings calls, and investor conferences—as allegedly

materially false or misleading. Critically missing from the CAC, however, are the particularized

facts necessary to adequately plead that any of these statements were false or misleading when

made. As the Fifth Circuit has long recognized, “[a] complaint can be long-winded, even prolix,

without pleading with particularity. Indeed, such a garrulous style is not an uncommon mask for

an absence of detail.” Southland, 365 F.3d at 362 (5th Cir. 2004) (quoting Williams v. WMX

Techs., Inc., 112 F.3d 175, 178 (5th Cir. 1997)). That is precisely the case here.

1. Key’s Code of Business Conduct and FCPA Compliance Manual are not actionable misstatements.

Among the dozens of statements that the CAC alleges were false and misleading

are the policy statements and other terms of Key’s Code of Business Conduct (the “Code”) and

FCPA Compliance Manual (the “Manual”). Specifically, Plaintiff points to recitations like

x the Code establishes “high standards of ethics and legal behavior for all employees and officers”;

x the FCPA “prohibits payments to foreign officials for the purpose of obtaining or keeping business”;

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x “[i]t is our policy that the Company, as well as each person or entity acting as a representative or advisor to the Company, shall fully comply with all applicable provisions of the FCPA”; and

x “[i]mproper gifts, payments or offerings of anything of value to foreign officials could jeopardize the growth and reputation of the Company, and will not be tolerated.”

CAC ¶¶ 155, 157; see also id. ¶¶ 94–99. According to the CAC, such statements “were

materially false and misleading because Defendants were, at the time these statements were

made, aware of and/or recklessly disregarded material weaknesses in Key’s internal controls that

were not disclosed to the investing public.” Id. ¶¶ 156, 158.

Under Section 10(b) and Rule 10b-5, however, a statement may be actionable

only if it is a misleading “statement of material fact.” Southland, 365 F.3d at 362. A fact is

material if there is “a substantial likelihood that, under all the circumstances, the omitted fact

would have assumed actual significance in the deliberations of the reasonable shareholder.” Id.

(quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976)). “[S]tatements of puffery or

mere generalizations are not material misstatements.” Woodward v. Raymond James Fin., Inc.,

732 F. Supp. 2d 425, 433 (S.D.N.Y. 2010); accord In re Franklin Bank Corp. Sec. Litig., 782 F.

Supp. 2d 364, 381 (S.D. Tex. 2011) (“Allegations that amount to little more than corporate

‘cheerleading’ are puffery, projections of future performance not worded as guarantees, and are

not actionable under federal securities law because no reasonable investor would consider such

vague statements material and because investors and analysts are too sophisticated to rely on

vague expressions of optimism rather than specific facts.”), aff’d sub nom. Harold Roucher Trust

U/A DTD 9/21/72 v. Nocella, 464 F. App’x 334 (5th Cir. 2012).

Applying the materiality requirement, courts have uniformly rejected Plaintiff’s

argument that statements like those in the Code and the Manual are actionable misstatements. In

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City of Brockton Retirement System v. Avon Products, Inc., for instance, the plaintiffs challenged

similar statements in Avon’s Code of Business Conduct and Ethics:

x “one of Avon’s fundamental principles is that its associates will observe the very highest standards of ethics in Avon’s business, so that even the mere appearance of impropriety is avoided”;

x “each Avon associate is responsible for complying with all laws and regulations that apply to his or her work, for adhering to the specific provisions of this Code, and for avoiding even the appearance of improper conduct”;

x “the [FCPA] prohibits Avon from offering or paying any money or other thing of value, directly or indirectly to any foreign government official”; and

x “bribes, kickbacks and payoffs to government officials, suppliers and others are strictly prohibited.”

No. 11-cv-4665 PGG, 2014 WL 4832321, at *16 (S.D.N.Y. Sept. 29, 2014). The Avon Products

plaintiffs argued precisely what the CAC alleges here—that the statements were materially false

and misleading because the defendants “were at that time aware of and/or recklessly disregarded

material weaknesses in Avon’s system of internal controls that were not disclosed to the

investing public.” Id. at *15. The district court rejected that argument, holding that “a

reasonable investor would not rely on the statements discussed above as a guarantee that Avon

would, in fact, maintain a heightened standard of legal and ethical compliance.” Id. at *16.

Because the statements “offer[ed] no assurance that Avon’s compliance efforts will be

successful,” but rather “merely set forth standards in generalized terms that Avon hoped its

employees would adhere to,” they were not material. Id.

Avon Products is in keeping with a long line of decisions where statements in

corporate codes of conduct were found to be immaterial puffery. See, e.g., Nathanson v.

Polycom, Inc., No. 13-cv-3476 SC, 2015 WL 1517777, at *6 (N.D. Cal. Apr. 3, 2015) (rejecting

claim based on code of conduct because “the standards contained therein are inherently

aspirational and hence immaterial,” and “[n]o reasonable investor would have construed [the

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statements] as not just an aspirational statement of intention, but a warranty that [the defendant

was] compliant”) (internal quotation marks omitted); In re YUM! Brands, Inc. Sec. Litig., No.

3:13-cv-00463-CRS, 2014 WL 7359168, at *13 (W.D. Ky. Dec. 24, 2014) (rejecting claim based

on code of conduct, reasoning that “[t]he adoption of a code of conduct does not imply that a

corporation or its employees always comply with the code’s guidelines,” as “[c]odes of conduct

state how a corporation or its employees ought to behave, not how they actually behave”);

Cement & Concrete Workers Dist. Council Pension Fund v. Hewlett Packard Co., 964 F. Supp.

2d 1128, 1141 (N.D. Cal. 2013) (holding that corporate ethics codes were immaterial and

inactionable puffery, “not projections of future conduct” or guarantees that the company and its

officers were in compliance with them when they were published); City of Roseville Emps.’ Ret.

Sys. v. Horizon Lines, Inc., 686 F. Supp. 2d 404, 415 (D. Del. 2009) (rejecting argument that

statements in company’s code of ethics, which was published on its website and referenced in

multiple SEC filings, would lead investors to believe that the company’s executives were acting

in conformity with its code, noting that “Plaintffs’ position has been soundly rejected by those

courts that have considered it”); Desai v. Gen. Growth Props., Inc., 654 F. Supp. 2d 836, 858–59

(N.D. Ill. 2009) (holding that company’s publishing code of ethics on its website “is [not]

equivalent to a representation that the code is not being violated” and thus could not be

considered misleading); Andropolis v. Red Robin Gourmet Burgers, Inc., 505 F. Supp. 2d 662,

685–86 (D. Colo. 2007) (holding that company’s adoption of code of ethics was not misleading

by omission, even though the CEO and CFO were violating the code at the time, because “the

mandatory nature of the adoption of such a code makes clear that all public companies—whether

run by crooks or angels—will adopt just such a code,” and doing so “does not imply that all of its

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directors and officers are following that code of ethics,” as such codes are “inherently

aspirational”).

But even if the Code and Manual could somehow be potentially actionable under

Section 10(b), the CAC contains no particularized facts demonstrating that anything in them was

false. Although the CAC cites repeatedly to allegations from six supposed “confidential

witnesses” (“CWs”), their allegations do not change the analysis or otherwise help the CAC pass

muster under the PSLRA. The sum and substance of the allegations from the six CWs4 is that, in

their opinions, Key’s FCPA controls were inadequate. CAC ¶¶ 7, 134–38, 143. Those

opinions—whether valid or invalid, whether shared by others or uniquely held by them—do not

come close to constituting particularized allegations demonstrating that the Code, the Manual, or

something the Individual Defendants said was false at the time.5 Notably,

x none of the CWs alleges that an FCPA violation actually occurred;

x none of the CWs alleges that s/he ever reported her/his concerns about FCPA controls to Key’s FCPA Compliance Officer, as required by Key’s Manual;6 and

x none of the CWs allegedly ever communicated her/his concerns, directly or even indirectly, to any of the Individual Defendants—none claims to have told any of the Individual Defendants of any problems with FCPA controls, nor did any

4 Actually, there are only four CWs, as the CAC strangely cites to CW3 and CW5 despite the fact that those two individuals apparently refused to talk with Plaintiff’s representatives. CAC ¶¶ 138, 140. 5 See, e.g., In re Intelligroup Sec. Litig., 527 F. Supp. 2d 262, 359–61 (D.N.J. 2007) (holding that “personal opinions void of specific details regarding the basis for [the CW’s] personal knowledge” add nothing to falsity or scienter); Zucco Partners, LLC v. Digimarc Corp., 445 F. Supp. 2d 1201, 1208 (D. Or. 2006) (“[A] shared opinion among confidential witnesses does not necessarily indicate either falsity or a strong inference of scienter if the allegations themselves are not specific enough” (quoting In re Metawave Commc’ns Corp. Sec. Litig., 298 F. Supp. 2d 1056, 1070 (W.D. Wash. 2003))), aff’d, 552 F.3d 981 (9th Cir. 2009). 6 Among other things, the Manual requires all employees to sign a Certificate of Compliance that includes the following: “I AGREE TO PROMPTLY CALL THE FCPA COMPLIANCE OFFICER AND PROVIDE A WRITTEN REPORT TO THE FCPA COMPLIANCE OFFICER FULLY DESCRIBING ANY CIRCUMSTANCES OF WHICH I AM AWARE THAT APPEAR TO BE A VIOLATION OR A POTENTIAL VIOLATION.” Ex. 22, KEY ENERGY SERVICES, INC., FOREIGN CORRUPT PRACTICES ACT COMPLIANCE MANUAL 22 (2008) [hereinafter, “KEY’S MANUAL”].

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author any memos or see any reports decrying the state of FCPA controls directed to the Individual Defendants.

Concerns of lower-level employees that are not elevated to the attention of the Individual

Defendants simply are not the stuff of Rule 10b-5 suits, as they have zero bearing on whether

anything said by the Individual Defendants was false at the time.7

Because Plaintiff has not pleaded with the requisite particularity that any of the

statements in Key’s Code or Manual were false when made, the CAC’s claims based on those

statements must be dismissed.8

7 Cf., e.g., Avon Prods., 2014 WL 4832321, at *32 (holding that confidential witnesses’ statements regarding the efficacy of the company’s FCPA compliance program were insufficient to demonstrate scienter without allegations that their concerns were raised or otherwise communicated such that the individual defendants “would have reason to know that the compliance programs in place were inadequate to detect FCPA violations”). 8 In addition to these defects, the Code and Manual are inactionable under Section 10(b) and Rule 10b-5 for at least three other reasons. First, as these documents themselves reflect, they were in effect long before the class period began (the Manual was created in June 2008 and the Code in April 2009, see CAC ¶¶ 94, 99), yet the Fifth Circuit has long recognized that confirmatory statements—meaning those that are the same as, or merely confirmatory of, prior statements—cannot be the basis of securities fraud claims. See Greenberg v. Crossroads Sys., Inc., 364 F.3d 657, 665–66 (5th Cir. 2004) (holding that plaintiff cannot establish a fraud on the market on the basis of confirmatory information because it “has already been digested by the market and will not cause a change in stock price”); see also, e.g., Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., No. 3:02-CV-1152-M, 2008 WL 4791492, at *2 (N.D. Tex. Nov. 4, 2008) (holding that “[c]onfirmatory statements, or information already known to the market,” cannot be actionable because “an efficient market does not respond to information already known”), rev;d on other grounds, 647 F.3d 533 (5th Cir. 2011). Since the challenged statements in the Code and Manual were the exact same as statements made before the class period, they cannot be actionable. Second, any such statements are barred by the five-year statute of repose for Rule 10b-5 claims. See Hall v. Variable Annuity Life Ins. Co., 727 F.3d 372, 375 n.4 (5th Cir. 2013) (explaining that for securities fraud claims under Sections 10(b) and 20(a) and Rule 10b–5, the applicable limitations and repose statute is 28 U.S.C. § 1658(b), which provides that such a claim “may be brought not later than the earlier of—(1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation”). Finally, the documents are classic examples of corporate documents with no attributed author and, as such, run afoul of the Fifth Circuit’s clear prohibition on group pleading. See, e.g., Shaw, 537 F.3d at 531 n.1 (stating that the Fifth Circuit has rejected the “‘group pleading doctrine,’ a judicial presumption that statements in group-published documents are attributable to those individuals with direct involvement in the everyday business of the company”).

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2. The CAC contains no particularized facts supporting Plaintiff’s allegation that Defendants failed to disclose that FCPA violations were responsible for Key’s growth in Mexico and Russia.

The vast majority of the rest of the CAC’s false-and-misleading-statement

allegations focus on Defendants’ statements in investor conferences, earnings calls, press

releases, and SEC filings about Key’s business and prospects in Mexico and Russia. See

generally CAC ¶¶ 155–218. Although wide-ranging, the statements pertain to the same general

themes:

x the importance of PEMEX to Key’s business in Mexico and optimism about the PEMEX relationship;9

x optimism about Key’s strategy and business model in Russia;10

x Key’s successes in Mexico and Russia and its expectations with respect to future opportunities for growth and expansion in those markets;11 and

x Key’s financial performance in those markets.12

9 E.g., CAC ¶¶ 159–60 (Alario: “[T]he core of our story is our business with PEMEX. And as I like to say, I don’t think there’s a better example of value delivered by a service company to a customer than Key’s value to PEMEX. . . . I think [that] proves that PEMEX has got confidence in Key.”) (second and third alterations in original); id. ¶ 182 (Alario: “[Y]ou now hopefully get a sense, on the back of this kind of value delivery, why we feel pretty confident that PEMEX is going to want to have Key involved in its activities this year and in the future.”) (emphasis omitted). 10 E.g., CAC ¶ 161 (Alario: “[Russia] was a place that we felt like we had to have a small investment in and that’s exactly the way you ought to think of it. . . . We do think of it as being potentially a good solid market. We’re trying to prove a new business plan there on the back of the idea that reliable equipment is more valuable to our customers than some of the equipment that they have there in country. It’s taking longer than we hoped. But I can tell you that over the course of the last couple of quarters, we’ve convinced more customers than we had in the past that’s the right business model and, as a result, our fortunes in Russia have improved.”). 11 E.g., CAC ¶ 170 (Alario: “Mexico is the bright spot. . . . We don’t have to have the Eagle Ford horizontals take place in Mexico to do well. There is lots of growth opportunity without that.”) (emphasis omitted); id. ¶ 182 (Alario: “I don’t have to tell you what’s been going on [in Mexico] with regard to the political scene and the potential for PEMEX to become more of a typical oil company. But that doesn’t have to happen for Key to meet its goals in Mexico.”) (emphasis omitted); id. ¶ 170 (Alario: “We now have had enough success to have been able to get a contract with a very large player [in Russia]. . . . [W]e kind of have to be there, but we don’t have a lot of capital invested and we continue to do to improve the business model conversion for certain customers in that marketplace and we expect that to continue.”).

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With only two exceptions, which are further addressed in Part IV.A.3 infra, the

CAC does not allege that the challenged statements falsely reported any facts about Key’s

performance in Mexico or Russia or otherwise mischaracterized how Key viewed its prospects

there.13 Rather, the CAC alleges that the statements were rendered false and misleading by a

failure to disclose what was purportedly fueling Key’s growth and growth strategy—FCPA

violations. See, e.g., CAC ¶ 162 (“[T]hese statements were materially false and misleading

because [Defendants] failed to disclose that Key’s growth strategy in Mexico and Russia was

largely attributable to or directly related to conduct that violated the FCPA.”); id. ¶ 176 (“The

statements . . . concerning Key’s growth in Russia and Mexico were materially false and

misleading because Defendants did not address the significance of the conduct that violated the

FCPA.”).

Plaintiff’s argument, however, fails on two fronts. First, Plaintiff pleads no

particularized facts indicating that any FCPA violations actually occurred. Plaintiff once again

trumpets the CW statements about perceived problems with Key’s internal controls, but, as

explained above, none of the CWs actually alleges that an FCPA violation occurred. Plaintiff

12 E.g., CAC ¶ 173 (Alario: “We anticipate another good year in 2013 in our international segment following 67% revenue growth in 2012. The stalled activity growth in Mexico in the fourth quarter has already resumed, and assets delivered to Mexico and Colombia late in 2012 should fuel additional growth given a full year’s contribution in 2013.”) (emphasis omitted); id. ¶ 179 (Key’s10-K: reporting that the fair value of its Russian assets exceeded the carrying value and that it did not record any assets impairments). 13 This omission in the CAC is not surprising, given that the vast majority of the challenged statements were precisely the kind of generalized, optimistic, and forward-looking statements and expressions of opinion that courts consistently have held to be inactionable puffery. See, e.g., Southland, 365 F.3d at 375, 376–77 (concluding that “[w]e enter 1998 with a great deal of momentum” and the “first quarter of 1998 was extremely significant for [the company]” were puffing); Rosenzweig v. Azurix Corp., 332 F.3d 854, 870 (5th Cir. 2003) (holding that “[t]he pipeline of private transactions and announced public tenders that we are pursuing remains strong” was puffing); In re Blockbuster Inc. Sec. Litig., No. 3:03-CV-0398-M, 2004 WL 884308, at *6–8 (N.D. Tex. Apr. 26, 2004) (holding that “[w]e think the retail business will continue to grow and we think the rental business will continue to grow” and “[w]e feel comfortable in our ability to grow our business in a meaningful and sustainable way over a long period of time” were puffing).

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also points to the ongoing FCPA investigations, assuming that they must create some form of

culpability. But that assumption lacks foundation, as an investigation does not equate to a

violation. Cf. In re China Valves Tech. Sec. Litig., 11 CIV. 0796 LAK, 2012 WL 4039852, at *8

(S.D.N.Y. Sept. 12, 2012) (finding, where defendant failed to disclose an FCPA investigation,

that “[w]ithout more, the alleged omission about potential FCPA liability is insufficient in its

present form” to constitute a material misstatement, noting that ultimately defendant was not

found liable for FCPA violations); Meyer v. Greene, 710 F.3d 1189, 1201 (11th Cir. 2013)

(noting in the context of a discussion on corrective disclosures for Section 10(b) purposes that

“[t]he announcement of an [SEC] investigation reveals just that—an investigation—and nothing

more”); Avon Products, 2014 WL 4832321, at *23 (“[T]he existence of an investigation alone is

not sufficient to give rise to a requisite cogent and compelling inference of scienter[.]” (quoting

In re Gentiva Sec. Litig., 932 F. Supp. 2d, 352, 380 (E.D.N.Y. 2011))). The investigations do not

establish a violation,14 much less a violation that was knowingly concealed by Defendants.

Second, a distinct but equally important assumption in Plaintiff’s theory is the

inferential leap that the alleged FCPA violations actually fueled Key’s growth. The CAC,

however, pleads no facts whatsoever about the practices giving rise to the purported FCPA

violations, let alone facts indicating that those practices actually generated any revenue for Key.

Even assuming FCPA violations occurred, the CAC contains no facts, much less particularized

facts, demonstrating that those violations led to any business or revenue for Key, much less that

14 See, e.g., CAC ¶ 219 (quoting Key 8-K statements that the SEC “is investigating possible violations of the U.S. Foreign Corrupt Practices Act”) (emphasis added); id. ¶ 222 (“In April 2014, the Company became aware of an allegation involving Key’s Mexico operations that, if true, could potentially constitute a violation of certain Company policies, including our Code of Business Conduct, the [FCPA] and other applicable laws. . . . [A]t this time the Company is unable to predict the ultimate resolution of these matters with these agencies.”) (emphasis added).

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the violations “fueled” or were an integral part in Key’s growth in Mexico and Russia.15

Without that foundational fact, Plaintiff’s entire theory that Defendants made misleading

statements about Key’s business in Mexico and Russia crumbles.

3. The CAC contains no particularized facts indicating that Defendants failed to disclose other problems with Key’s business in Mexico.

In two instances, the CAC alleges that statements were false and misleading not

only because of undisclosed FCPA violations, but also because of undisclosed “facts” about

Key’s business:

x Alario’s statements at the September 4, 2012 Barclays Capital CEO Power Energy Conference that “the core of our story is our business with PEMEX. And as I like to say, I don’t think there’s a better example of value delivered by a service company to a customer than Key’s value to PEMEX”; that “I think [that] proves that PEMEX has got confidence in Key”; and that “it feels good that the customer’s got confidence in us.” CAC ¶¶ 159–60 (alteration in original).

x Wilson’s statement in the November 1, 2012 earnings call that “our most meaningful growth has been in Mexico. Enjoyed success in Mexico primarily because PEMEX recognizes the value we deliver in terms of tangible production improvements. We started operations in Mexico in 2007, with three rigs in the ATG asset of PEMEX’s northern region. Today we’re operating over 40 rigs largely in that same asset and we have recently begun broadening our presence.” Id, ¶ 168 (emphasis omitted).

According to the CAC, these statements “were materially false and misleading” because

“Defendants failed to disclose that revenues from PEMEX were overstated due to overbilling

and that the Company’s production from PEMEX was in decline.” Id. ¶¶ 162, 169.16

15 FCPA violations do not depend on successfully obtaining business through prohibited conduct. See, e.g., Ex. 21, U.S. DEP’T OF JUSTICE & U.S. SEC. & EXCH. COMM’N, A Resource Guide to the U.S. Foreign Corrupt Practices Act, at 14 (2012) (hereinafter “DOJ/SEC Resource Guide”) (“By focusing on intent, the FCPA does not require that a corrupt act succeed in its purpose.”); cf. United States v. Kay, 359 F.3d 738 (5th Cir. 2004) (focusing on the defendant’s intent when addressing the scope of FCPA liability). Moreover, as Key’s Manual noted, “a U.S. company can face FCPA liability based on improper payments made by its agents or other business partners, whether or not Key knew of the payments.” Ex. 22, KEY’S MANUAL 7. 16 The CAC also asserts that Alario’s statements about Russia during the conference were misleading because of the failure to disclose that revenues from PEMEX were overstated and that

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As a threshold matter, the challenged statements are precisely the kind of

generalized, optimistic statements and expressions of opinion that courts consistently have held

to be inactionable puffery. See, e.g., Southland, 365 F.3d at 372 (defining non-actionable

puffery to include statements “of the vague and optimistic type” that “contain no concrete factual

or material misrepresentation” (quoting Lain v. Evans, 123 F. Supp. 2d 344, 348 (N.D. Tex.

2000))); Local 210 Unity Pension & Welfare Funds v. McDermott Int’l Inc., No. 4:13-CV-2393,

2015 WL 1143081, at *8 (S.D. Tex. Mar. 13, 2015) (dismissing securities fraud claims because

the challenged statements, which did not speak in “concrete terms” or “assure” investors of any

facts, were “non-actionable puffery”). But even if they somehow qualified as statements of fact,

the CAC contains no factual basis to support a claim that the statements were false when made.

The CAC pleads no facts indicating that Key actually overbilled PEMEX in 2012, let alone that

Alario or Wilson—or anyone else at Key—knew about any such overbilling at that time. Nor

does the CAC allege facts indicating that Defendants knew of an undisclosed decline in Key’s

production from PEMEX in 2012.

Instead, the CAC predicates its falsity allegation on a single fact—that more than

a year-and-a-half later, in January 2014, PEMEX audited Key’s billings, which resulted in Key’s

taking a $3.2 million pre-tax charge. CAC ¶¶ 162, 169. But the fact that Key had an adverse

development in 2014 provides no basis for inferring that something Defendants said in 2012 was

false at the time.17 Indeed, the Fifth Circuit and other courts have long rejected such claims of

production from PEMEX was in decline. CAC ¶¶ 160–62. This allegation is presumably a drafting error, given the absence of a logical connection between Key’s operations in Russia and its revenues from PEMEX. 17 Key reported that PEMEX’s audit encompassed “the Company’s aggregate billings of $372 million under its contracts with PEMEX.” Ex. 14, Jan. 6, 2014 Press Release at 1. Key had operated in Mexico before the class period under contracts awarded by PEMEX to Key’s Mexican subsidiary in 2008 and 2009. See, e.g., Ex. 23, Feb. 27, 2009 Form 10-K at 11–12. Since the audit included the Company’s aggregate billings, there is no basis to infer that charge even related to billings during the class period.

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“fraud-by-hindsight”—where “a plaintiff alleges that the fact that something turned out badly

must mean defendant knew earlier that it would turn out badly,” or “where there is no

contemporaneous evidence at all that defendants knew earlier what they chose not to disclose

until later.” Lormand v. US Unwired, Inc., 565 F.3d 228, 254 (5th Cir. 2009) (quoting Miss.

Pub. Emps.’ Ret. Sys. v. Boston Scientific Corp., 523 F.3d 75, 91 (1st Cir. 2008)); see, e.g.,

Rosenzweig v. Azurix Corp., 332 F.3d 854, 867–68 (5th Cir. 2003) (affirming dismissal of

securities fraud class action where certain factual underpinnings on which the plaintiffs relied

were “plainly a hindsight assessment” of the defendants’ performance); In re Anadarko Petrol.

Corp. Class Action Litig., 957 F. Supp. 2d 806, 821 n.5 (S.D. Tex. 2013) (holding that statements

expressing Anadarko’s commitment to safety were inactionable where plaintiffs’ falsity

allegations consisted solely of the occurrence of the Deepwater Horizon explosion, given that

“fraud-by-hindsight is not a valid theory under Rule 10b”); In re Alamosa Holdings, Inc., 382 F.

Supp. 2d 832, 866 (N.D. Tex. 2005) (“Fraud by hindsight is not an actionable claim under the

securities laws. The setting of forward projections which ultimately fail to materialize cannot

form the basis for a securities fraud action under the circumstances of this case.”).

There is no suggestion, much less any factual support, that the PEMEX audit

occurred any sooner than it was disclosed. Nor did Defendants ever state that PEMEX would

never audit Key. And there is no basis to infer that the $3.2 million pre-tax charge—which

amounted to less than 1% of the $372 million of billings audited—resulted from overbilling, as

opposed to disputes over exchange rates, the scope of work on a project, or anything else.

Finally, even if the charge was related to alleged overbillings, there is no basis to infer that

Alario and Wilson knew of such overbillings at the time of their challenged statements. As such,

the CAC simply fails to plead an actionable misrepresentation based on the PEMEX audit.

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4. Alario and Whichard’s SOX Certifications are inactionable.

Plaintiff also complains about the certifications required by the Sarbanes-Oxley

Act of 2002 (“SOX Certifications”) that were signed by Alario and Whichard and attached to

Key’s SEC filings during the class period.18 According to Plaintiff, the SOX Certifications—

which contain statements like “[b]ased on my knowledge, this report does not contain any untrue

statement of a material fact or omit to state a material fact necessary to make the statements . . .

not misleading,” and “[we] have . . . [e]valuated the effectiveness of the registrant’s disclosure

controls and procedures and presented in this report our conclusions about the[ir] effectiveness

. . . based on such evaluation”—were materially false and misleading because Alario and

Whichard “were at the time aware of and/or recklessly disregarded material weaknesses in Key’s

internal controls that were not disclosed to the investing public.” CAC ¶ 166–67. But that

argument mistakes the financial reporting controls at issue in the SOX certifications for anti-

corruption policies or controls designed to ensure FCPA compliance. See, e.g., In re Invision

Techs., Inc. Sec. Litig., No. C-04-3181 MJJ, 2006 WL 538752, at *6 & n.2 (N.D. Cal. Jan. 24,

2006) (rejecting allegation that purported lack of FCPA-related controls rendered SOX

certifications false and misleading).

Even assuming arguendo that the SOX certifications could give rise to a claim

that Alario and Whichard warranted the existence of internal controls adequate to uncover any

and all improper conduct, Plaintiff still must assert particularized facts indicating that Alario and

Whichard knew that what they were certifying was untrue. See, e.g., City of Roseville, 686 F.

Supp. 2d at 420 (“[SOX] does not mandate officers certify that their company’s reports are

18 See CAC ¶ 166 (citing Ex. 24, Q3 2012 10-Q); id. ¶ 181 (citing Ex. 5, 2012 10-K); id. ¶ 190 (citing Ex. 10, Q1 2013 10-Q); id. ¶ 198 (citing Ex. 12, Aug. 2, 2013 10-Q); id. ¶ 203 (citing Ex. 9, Nov. 1, 2013 10-Q); id. ¶ 214 (citing Ex. 1, Feb. 25, 2014 10-K).

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completely devoid of any misleading statements or omissions. Officers are not guarantors of

their truth. Instead, they must certify that they personally have no knowledge of such misleading

statements or omissions. . . . [T]hey can only certify the truthfulness of their reports based on the

information they know, or of which they should reasonably have been aware, at the time.”); see

also Shaw, 537 F.3d at 545 (“There must be, in other words, facts establishing that the officer

who signed the certification had a reason to know, or should have suspected, due to the presence

of glaring accounting irregularities or other ‘red flags,’ that the financial statements contained

material misstatements or omissions”). The CAC’s failure to allege facts indicating that, at the

time they signed the SOX Certifications, Alario and Whichard knew of or recklessly disregarded

any weaknesses in Key’s internal controls is fatal.19

B. The CAC does not plead particularized facts giving rise to a strong inference of scienter.

In addition to failing to plead with the requisite particularity that Defendants made

a false or misleading statement, Plaintiff has failed to establish the required strong inference of

scienter. See 15 U.S.C. § 78u-4(b)(2); Shaw, 537 F.3d at 533. As explained in Part III supra,

scienter requires an “intent to deceive, manipulate, or defraud, or severe recklessness.” Shaw,

19 Although the CAC identifies the SOX Certifications as examples of material misstatements, it is not clear whether the CAC also relies on them to support an inference of scienter. To the extent that it does, that effort is futile, as courts routinely reject such certifications as a basis for inferring scienter. See, e.g., In re Franklin Bank, 782 F. Supp. 2d at 378 (“To infer scienter from SOX certifications, there must be facts establishing that the officer who signed the certification had a ‘reason to know, or should have suspected, due to the presence of glaring accounting irregularities or other “red flags,” that the financial statements contained material misstatements or omissions.’” (quoting Shaw, 537 F.3d at 545)); In re Michaels Stores, Inc. Sec. Litig., No. 3:03-CV-0246, 2004 WL 2851782, at *12 & n.11 (N.D. Tex. Dec. 10, 2004) (rejecting use of SOX certifications as a basis for drawing a strong inference of scienter because the statements in the particular certification were not sufficiently related to the alleged misstatements in the complaint); see also Garfield v. NDC Health Corp., 466 F.3d 1255, 1266–67 (11th Cir. 2006) (finding that SOX certifications are not probative of scienter unless there are “glaring accounting irregularities or other ‘red flags[]’ that the financial statements contained material misstatements or omissions”); Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 1003–04 (9th Cir. 2009), as amended (Feb. 10, 2009) (“Boilerplate language in a corporation’s 10–K form, or required certifications under [SOX] . . . add nothing substantial to the scienter calculus.”).

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537 F.3d at 533 (internal quotation marks omitted). Allegations of “motive and opportunity”

alone are not sufficient to meet this requirement—although such allegations “may enhance other

allegations of scienter.” Abrams v. Baker Hughes Inc., 292 F.3d 424, 430 (5th Cir. 2002).

Conversely, where no motive is apparent, the circumstantial evidence supporting a strong

inference of scienter must be even greater. See Nathenson, 267 F.3d at 410, 420–21.

Furthermore, a plaintiff cannot rely upon “the collective knowledge of the corporation’s officers

and employees acquired in the course of their employment” but instead must plead facts about

the state of mind of each defendant. See Southland, 365 F.3d at 365–66. Finally, Key can have

scienter only if one of the Individual Defendants had scienter. See, e.g., id. at 366 (“A defendant

corporation is deemed to have the requisite scienter for fraud only if the individual corporate

officer making the statement has the requisite level of scienter . . . .”). The CAC does not come

close to meeting these requirements.

1. With no allegations of apparent motive to commit securities fraud, Plaintiff fails to meet its burden of pleading specific circumstantial evidence that any individual acted with the requisite scienter.

Plaintiff fails to allege any motive—be it insider trading or personal profit—for

Defendants’ alleged misrepresentations. The CAC does not allege that any Defendant sold Key

stock at all during the class period, much less at suspicious times or in suspicious amounts, or

that any Defendant somehow profited from the alleged fraud. This absence of an apparent

motive for Defendants to commit securities fraud undermines any inference of scienter. See

Nathenson, 267 F.3d at 410, 421 (“‘The fact that the other defendants did not sell their shares

during the relevant class period undermines plaintiffs’ claim.’” (quoting Acito v. IMCERA Grp.

Inc., 47 F.3d 47, 54 (2d Cir. 1995))).

The lack of motive allegations requires an even stronger showing of

circumstantial evidence of scienter—that Defendants consciously disregarded the truth when

Active 18232500 27


they made the statements at issue. See R2 Invs., 401 F.3d at 644 (“Where, as here, the plaintiff

has not alleged a clear motive for the alleged misstatements or omissions, the strength of its

circumstantial evidence of scienter must be correspondingly greater.”); accord Tuchman v. DSC

Comm’ns Corp., 14 F.3d 1061, 1068 (5th Cir. 1994). Such circumstantial evidence must be

highly particularized, such that it shows, in detail, that a specific individual knew that a specific

statement was false at the time that the individual made the statement. Southland, 365 F.3d at

366, 374; Abrams, 292 F.3d at 432. This requires, for example, allegations naming specific

documents—including the author, recipient, date and contents—that demonstrate that the

Individual Defendants knew they were being untruthful when they made the challenged

statements. Allegations of unnamed documents or regular reports that the Individual Defendants

received by virtue of their positions do not suffice. See Abrams, 292 F.3d at 432 (“The

plaintiffs’ allegations regarding non-specific internal reports are also inadequate. An

unsupported general claim about the existence of confidential corporate reports that reveal

information contrary to reported accounts is insufficient to survive a motion to dismiss. Such

allegations must have corroborating details regarding the contents of allegedly contrary reports,

their authors and recipients.”) (footnote omitted). Likewise, allegations of weaknesses in

internal controls or even actual accounting violations are insufficient without specific allegations

that particular defendants knew about them. See In re Dell Inc., Sec. Litig., 591 F. Supp. 2d 877,

894 (W.D. Tex. 2008) (“Without specific allegations the Individual Defendants themselves

actually knew about a specific accounting violation or internal control problem, the pleadings are

simply too vague to support a strong inference of scienter.”).

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Contrary to these requirements, the CAC does not cite a single document or quote

a single witness20 to show that any Individual Defendant acted with scienter in making any

particular statement. Given this failure, the CAC is akin to the bevy of cases in which the Fifth

Circuit has affirmed dismissal for failure to plead facts giving rise to a strong inference of

scienter.21

2. The ongoing FCPA investigations do not strengthen the inference of scienter.

Instead of offering particularized allegations of scienter, Plaintiff again relies

heavily on the ongoing FCPA investigations. Specifically, Plaintiff points to Key’s

announcement of the SEC investigation of Key’s Russia operations and Key’s internal

investigation of its Mexican operations and, later, its Colombian operations and alleges that

“Key’s violations of the FCPA could not have been perpetrated in so many different markets

20 Although the CAC repeatedly references the alleged CW statements, none of the CWs points to concrete facts indicating that any particular Defendant knew that any particular statement was false when made, let alone that any Defendant acted with scienter in making it. The immateriality of the CW statements is discussed further in Part IV.A.1 supra and Part IV.B.5 infra. 21 See, e.g., Pipefitters Local No. 636 Defined Benefit Plan v. Zale Corp., 499 F. App’x 345, 350–51 (5th Cir. 2012) (affirming dismissal with prejudice where plaintiff relied only on a statement in an SEC complaint and public statements by a company officer, but presented no other documentary evidence that the defendants acted with scienter); Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 212 (5th Cir. 2009) (affirming dismissal for failure to provide evidence supporting a strong inference of scienter); Cent. Laborers’ Pension Fund v. Integrated Elec. Servs., Inc., 497 F.3d 546, 549–56 (5th Cir. 2007) (affirming dismissal of a Rule 10b-5 suit because complaint failed to plead scienter with sufficient particularity despite allegations of GAAP violations that led to the restatement of more than two years of financial reports, false SOX certifications, insider trades, and allegations from a CW that an individual defendant “did not want to know the details of a revenue issue so that he would not be liable”); Shaw, 537 F.3d at 538–39 (concluding that district court erred in denying a motion to dismiss where plaintiffs did not supply any documentary or personal sources for the majority of their allegations and failed to plead the necessary factual support for scienter); R2 Invs., 401 F.3d at 644–45 (affirming dismissal where “absent any allegation of motive,” plaintiff failed to adequately plead scienter and dismissing the complaint without considering the district court’s other grounds for dismissal); Goldstein v. MCI WorldCom, 340 F.3d 238, 253 (5th Cir. 2003) (finding the plaintiffs’ pleading insufficient to demonstrate a strong inference of scienter); Rosenzweig, 332 F.3d at 867–68 (holding that the plaintiffs failed to “identify exactly who supplied the information or when they knew the information”); Abrams, 292 F.3d at 432 (affirming dismissal based solely on plaintiff’s failure to plead facts giving rise to a strong inference of scienter).

Active 18232500 29


without the knowledge, complicity and/or acquiescence of personnel at the highest levels of the

Company.” CAC ¶ 227.

Leaving aside the fact that this is the type of conclusory allegation that courts

consistently recognize as being meaningless under the PSLRA, see, e.g., Thompson v.

RelationServe Media, Inc., 610 F.3d 628, 687 (11th Cir. 2010) (rejecting virtually identical

“‘they must have known’ allegation” because it is “absolutely clear that this sort of conclusory

allegation could not satisfy the requirement that the complaint state facts with particularity”)

(internal quotation marks omitted), this scienter argument requires at least two inferential leaps.

First, it requires the Court to assume that FCPA violations actually occurred—not based on any

independent facts that Plaintiff has alleged, but based solely on the fact of an investigation. But

it hardly follows that because there is an FCPA investigation, that there must have been an FCPA

violation. See In re China Valves, 2012 WL 4039852, at *8; Meyer, 710 F.3d at 1201. Second,

Plaintiff’s argument requires the Court to assume that the individual defendants “must have

known” about these violations simply by virtue of their assumed occurrence. Yet courts also

routinely recognize that scienter cannot be inferred on the basis of the positions or titles held by

the defendants. See Part IV.B.4 infra. In short, this type of inference-upon-inference pleading

does not meet the strict pleading standards set forth in the PSLRA. See, e.g., Wolfe v. Aspenbio

Pharma, Inc., 587 F. App’x 493, 498 (10th Cir. 2014) (“[A]llegations of scienter are insufficient

when the complaint requires the court to ‘stack inference upon inference to even conclude that

the statements were false—much less that defendants knew or were reckless in not knowing they

were false.’” (quoting In re Level 3 Commc’ns, Inc. Sec. Litig., 667 F.3d 1331, 1345 (10th Cir.

2012))); In re Odyssey Healthcare, Inc. Sec. Litig., 424 F. Supp. 2d 880, 890 (N.D. Tex. 2005)

(holding that complaint improperly “require[d] stacking an inference upon an inference”).

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The recent opinion in Avon Products aptly illustrates this point, as the court there

dismissed a 10b-5 complaint based upon FCPA allegations far more particularized than those in

the CAC. Avon’s growth resulted in large part from its expansion in China, where it had been

one of the first companies to receive a license to use direct selling. 2014 WL 4832321, at *1.

Avon’s CEO and Chief Financial Strategy Officer (CFSO) both made repeated statements

touting Avon’s strong growth in China, which they attributed in large part to the roll out of the

direct selling model. Id. at *3–5. The CEO later received what Avon called “credible

allegations” concerning possible FCPA violations in China, and Avon began an investigation.

Id. at *5. By the time the securities suit was filed against Avon, the CEO, and the CFSO, the

SEC had commenced a formal investigation into possible FCPA violations; Avon had terminated

various people, including its senior vice president over China; Avon’s business in China had

plummeted; Avon had announced that the CEO was “step[ping] down;” and Avon had

terminated the CFSO at least in part due to FCPA issues. Id. at *7–11. Despite all those

particularized facts, the court dismissed the 10b-5 claim for lack of scienter, holding that

plaintiffs failed to “demonstrate that Defendants were aware that Avon’s financial successes in

2008 and the first half of 2009 were the result of FCPA violations, or that Defendants knew the

extent to which bribes paid during earlier periods contributed to those successes.” Id. at *27–29.

The court specifically noted that the complaint failed to allege with particularity that the alleged

bribes were reported to the CEO or the CFSO. Id.

In short, the FCPA investigations do not save the CAC from its failure to

demonstrate that any Defendant acted with the requisite scienter.

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3. Key’s internal controls do not give rise to any inference of scienter, much less a strong one.

In a similar vein, Plaintiff tries to make the inferential leap that “[i]f [Key’s]

internal controls were working properly, Key’s senior management would have been alerted to

these FCPA risks before they materialized.” CAC ¶ 228. But the mere existence of internal

controls cannot give rise to a strong inference of scienter, as even well-performing internal

controls cannot assure that violations will not occur. See, e.g., Midwestern Teamsters Pension

Trust Fund v. Baker Hughes Inc., Civ. A. H-08-1809, 2009 WL 6799492, at *8 (S.D. Tex. May

7, 2009) (granting motion to dismiss based on failure to bring demand because “it appears that a

number of the violations complained of occurred despite clear company policies and

procedures”) (emphasis in original); id. at *6 (“Delaware courts routinely reject the conclusory

allegation that because illegal behavior occurred, internal controls must have been deficient, and

the board must have known so.” (quoting Desimone v. Barrows, 924 A.2d 908, 940 (Del. Ch.

2007))); Ex. 21, DOJ/SEC Resource Guide at 56 (“These considerations reflect the recognition

that a company’s failure to prevent every single violation does not necessarily mean that a

particular company’s compliance program was not generally effective.”); cf. Dobina v.

Weatherford Int’l Ltd., 909 F. Supp. 2d 228, 249 (S.D.N.Y. 2012) (“Similarly unpersuasive is the

alleged lack of internal controls . . . internal controls provide little if any circumstantial support

that the statements [alleged to be false] were made with scienter.”) (emphasis in original).

In addition to resting on improper inference stacking, Plaintiff’s position directly

contradicts its allegations that Key’s Code and Manual and Alario’s and Whichard’s SOX

Certifications were false. As detailed in Part IV.A.1 supra, Plaintiff insists that those statements

were false and misleading because “Key’s internal controls were woefully inadequate.” CAC

¶ 245. Yet, in an effort to plead scienter, Plaintiff alleges the exact opposite—that the existence

Active 18232500 32


of rigorous compliance programs at Key means that the Individual Defendants would have

known of FCPA violations when they occurred, and that “any illegal payments made from Key’s

Russian or Mexican operations . . . could not have been made without the knowledge and

approval of its senior management.” CAC ¶ 114; see also id. ¶ 241 (“[H]ad Key’s compliance

machinery been as developed and stringent as Defendants represented, it would have been

impossible for Defendants not to know that its success in certain international markets was, at

least in part, the result of rampant FCPA violations.”) (emphasis omitted). Those arguments are

mutually exclusive—if Key’s internal controls were so deficient as to make Key’s Code and

Manual false and misleading, then those controls could not have led to the discovery of the

alleged FCPA problems. The fact that Plaintiff is relegated to taking a contradictory, contorted

position when attempting to plead scienter simply highlights the insurmountable pleading

problems with the CAC.

4. The CAC’s allegations regarding the Individual Defendants’ executive positions and roles within the Company do not give rise to a strong inference of scienter.

Equally unavailing are Plaintiff’s rote allegations that the Individual Defendants

must have known the truth by virtue of their “associations with the Company.” E.g., id. ¶ 226.

This assertion ignores the repeated holding by the Fifth Circuit that “[a] pleading of scienter may

not rest on the inference that defendants must have been aware of the misstatement based on

their positions within the company.” Abrams, 292 F.3d at 432; accord Nathenson, 267 F.3d at

424 (“[N]ormally an officer’s position with a company does not suffice to create an inference of

scienter.”); Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 211–

12 (5th Cir. 2009) (same); see also In re Azurix Corp. Sec. Litig., 198 F. Supp. 2d 862, 890 (S.D.

Tex. 2002) (“Merely alleging that the defendants knew or had access to information by virtue of

their board or managerial positions is not sufficient to plead scienter.”), aff’d sub nom. by

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Rosenzweig, 332 F.3d 854. Thus, an allegation of severe recklessness cannot be based on an

argument that defendants “should have known,” nor can it assume that “their lack of knowledge

based on their corporate positions demonstrates recklessness.” Abrams, 292 F.3d at 432.

Plaintiff attempts to circumvent this prohibition by invoking the “core operations”

doctrine, a narrow and rare exception under which—in extraordinary circumstances—courts

permit the inference that executives “must have known” certain facts. See Nathenson, 267 F.3d

at 424–25. In Nathenson, the Fifth Circuit recognized the rule that “an officer’s position with a

company does not suffice to create an inference of scienter.” id. at 424. The court went on to

hold, however, that the facts of that case presented a collection of “special circumstances” that

sufficed—“if perhaps only barely so”—to support the requisite inference of scienter with respect

to the CEO’s knowledge of the falsity of Zonagen’s statement that it had acquired rights to a

patent covering its new drug. Id. at 425. Those circumstances were: (1) Zonagen was

“essentially a one product company,” and its SEC filings indicated that substantially all of its

efforts and expenditures over the next several years would be devoted to that drug; (2) patent

protection was important to the company, and its ability to compete effectively would depend on

the proprietary nature of its patents and technologies; (3) the company had acquired the patent

rights in question two years before the misstatement, allowing ample opportunity to become

familiar with them; (4) the company was small, with less than forty employees; and (5) the

officer in question had made public statements indicating that the company’s patent did not cover

the drug. Id.

Courts have subsequently limited the application of Nathenson to instances in

which the “business unit or product”—about which the challenged statements were made—is

effectively the only product of a small-scale company. See, e.g., Dawes v. Imperial Sugar Co.,

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975 F. Supp. 2d 666, 699 (S.D. Tex. 2013) (collecting authority demonstrating that “[t]he Fifth

Circuit and other courts have been reluctant to apply Nathenson’s limited exception to the

particularized pleading required for scienter”22 and refusing to doctrine because plaintiff did not

plead facts showing “that the refined-sugar purchases were so essential to Imperial’s operations

that knowledge could be presumed under the limited circumstances permissible under

Nathenson”); Anadarko, 957 F. Supp. 2d at 824–25 (rejecting plaintiffs’ argument that because

deepwater drilling is of critical importance to Anadarko, its representations regarding its offshore

Macondo well fell within the Nathenson “core operations” doctrine, concluding that “regardless

of the importance of deepwater drilling or the Gulf of Mexico to Anadarko, it cannot be

presumed that Anadarko’s top executives knew the most granular details regarding operations

within those business segments”).

Nathenson likewise does not support an inference of scienter here. Even

accepting as true the CAC’s allegation that “international expansion was a critical component to

Key’s growth strategy,” and “Mexico and, to a lesser extent, Russia, were the cornerstones of

Key’s international growth strategy,” CAC ¶¶ 242–43, that is an insufficient foundation for the

22 See Rosenzweig, 332 F.3d at 867, 868 (rejecting the plaintiffs’ argument that “the failure of Azurix’s core business—water privatization projects—supports the inference that defendants knew, or recklessly disregarded, Azurix’s prospects for success” and holding that the plaintiffs must “identify exactly who supplied the information or when they knew the information”); Abrams v, 292 F.3d at 432 (“A pleading of scienter may not rest on the inference that defendants must have been aware of the misstatement based on their positions within the company.”); Collmer v. U.S. Liquids, Inc., 268 F. Supp. 2d 718, 754 (S.D. Tex. 2003) (“Plaintiffs have relied on the judicially created presumption that facts critical to a business’s core operations or an important transaction generally are so apparent that their knowledge may be attributed to the company and its key officers. . . . [T]he purpose of the PSLRA’s particularized pleading requirements leads this Court to find that such an imputation, without some additional facts such as exposure to content-identified internal corporate documents (and who drafted them, who received them or how plaintiffs learned of them) or specific conversations or attendance at specified management or board meetings dealing with such problems, is inadequate to plead scienter.”) (footnote omitted) (citation omitted) (internal quotation marks omitted)); see also Elam v. Neidorff, 544 F.3d 921, 929 (8th Cir. 2008) (interpreting Rosenzweig as rejecting the “core operations method of pleading scienter”).

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core operation doctrine. See, e.g., Tyler v. Liz Claiborne, Inc., 814 F. Supp. 2d 323, 343

(S.D.N.Y. 2011) (“[C]ourts have required that the operation in question constitute nearly all of a

company’s business before finding scienter based on the ‘core operations doctrine.’”). Critically,

the CAC does not allege that Key is a small-scale company, or that its operations in Mexico and

Russia “constitute nearly all of [its] business.” Id. Nor could it; Key’s entire international

operations amounted to only about 13.5% of the Company’s revenue in 2013. See Ex. 1, Feb.

25, 2014 Form 10-K at 30. Thus, Plaintiff’s attempt to make out a plausible scienter argument

based on the core operations doctrine also must fail.

5. The confidential witness allegations add nothing to the scienter analysis.

Finally, to the extent that the CAC relies on the CWs, see CAC ¶ 241, their

allegations add nothing to the scienter analysis. As set explained in Part IV.A.1 supra, at best,

the CW allegations establish that lower-level employees had concerns that were never elevated

to the attention of the Individual Defendants. But that is an insufficient basis for inferring

scienter.

For three of the four Individual Defendants—Alario, Whichard, and Dodson—the

CAC alleges no personal interactions with any of the CWs. This fact alone renders the CWs

incapable of providing facts relevant to those Individual Defendants’ scienter, as “it is difficult to

surmise how the opinions and observations of the CWs could support a reasonable inference

about what these individual Defendants knew or did not know at the time each of the challenged

statements was made.” In re Accuray, Inc. Sec. Litig., 757 F. Supp. 2d 936, 948–49 (N.D. Cal.

2010); accord McCasland v. FormFactor, Inc., No. 07-cv-5545 SI, 2008 WL 2951275, at *8

(N.D. Cal. July 25, 2008) (“Importantly, none of the CWs is alleged to have had any interaction

or communication with any of the defendants, or to have provided any defendant with

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information, or to have heard or read any statement by any defendant, that contradicted or even

cast doubt on a public statement made during the class period.”).

With respect to Wilson, the CAC alleges a single interaction with CW4, a

purported Senior Director of Global Marketplace Performance Improvement during the class

period. CAC ¶ 139. According to the CAC, CW4 stated that s/he “got a call from . . . Wilson,

who said, ‘You can’t ask me any questions as to why, but [SVP International] is no longer with

the company and you will be reporting to [another Senior Vice President].” Id. (second and third

alterations in original). The significance of the fact that Wilson allegedly relayed—that an

unnamed Senior Vice President was let go for unexplained reasons—is entirely unclear from the

CAC. Wilson’s comment reveals nothing fraudulent on its face, and it certainty fails to prove

any scienter on the part of Wilson with respect to any particular statement that the CAC alleges

was false when he made it. See, e.g., Shaw, 537 F.3d at 538 (explaining that if an ambiguous

statement is susceptible to many interpretations, including innocent ones, it will not contribute to

an inference of scienter).

Not a single allegation by any of Plaintiff’s CWs sets forth any facts that lead to a

strong inference of scienter on the part of any Individual Defendant. Therefore, the CWs’

allegations should be given no weight by the Court.

In short, even when all of the CAC’s scienter allegations are taken together,23

they fail to give rise to a strong inference that Defendants acted with scienter when they made

the statements about which Plaintiff complains. Accordingly, Defendants’ motion to dismiss the

CAC for insufficient scienter allegations should be granted.

23 See Abrams, 292 F.3d at 431 (explaining that the inquiry is whether, taken together, the facts alleged give rise to a strong plausible inference of scienter).

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C. The CAC fails to adequately plead loss causation.

Finally, the CAC does not contain sufficient “facts to give rise to a reasonable

hope or expectation that discovery will reveal evidence . . . of loss causation.” Lormand, 565

F.3d at 258. That is because Plaintiff relies on stock price drops that it claims resulted from the

disclosures of the FCPA-related investigations, rather than corrective disclosures of previous

(and allegedly fraudulent) misstatements.

To adequately plead loss causation, Plaintiff must do more than plead that it

purchased Key’s securities at inflated prices and that Key’s stock price fell following negative

news about the Company’s finances and operations. Id. at 256; Archdiocese of Milwaukee

Supporting Fund, Inc. v. Halliburton Co., 597 F.3d 330, 340–41 (5th Cir. 2010), vacated on

other grounds sub nom. Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011).

Plaintiff must make a plausible showing that when “the ‘relevant truth’ about the fraud began to

leak out . . . it caused the price of the stock to depreciate and thereby proximately cause the

plaintiff’s economic loss.” Lormand, 565 F.3d at 255. In particular, Plaintiff must allege that

the stock price declined in response to “a corrective disclosure,” i.e., a statement demonstrating

that the “the truth ‘ma[de] its way into the marketplace.’” Archdiocese, 597 F.3d at 336

(alteration in original) (quoting Alaska Elec. Pension Fund v. Flowserve Corp., 572 F.3d 221,

229 (5th Cir. 2009)); see also In re Dell, 591 F. Supp. 2d at 907 (“Plaintiffs must allege,

therefore, the market reacted negatively to a corrective disclosure, which revealed the falsity of

[the] previous representations.”).

Here, the CAC must be dismissed because it suffers from a complete disconnect

between the alleged fraud and the disclosures that precipitated the stock price drops at issue. The

CAC focuses on two specific stock price drops: the $0.64 drop that followed Key’s disclosure of

the investigation concerning possible FCPA violations in Russia, and the $1.34 drop that

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followed Key’s July 17, 2014 disclosure that it would take the pre-tax charge associated with the

writedown of goodwill from the Geostream acquisition; that Key had incurred approximately

$5 million in pre-tax expenses in connection with FCPA-related investigations involving Key’s

operations in Russia and Mexico; and that it expected a loss for the quarter of $0.35 to $0.38 per

share. CAC ¶¶ 219–20, 222–23. But these statements do not represent “truths” that had

previously been suppressed or hidden from the marketplace.

A statement concerning investigations, standing alone, cannot constitute a

corrective disclosure as a matter of law. See, e.g., Pub. Emps.’ Ret. Sys. of Miss., P.R. Teachers

Ret. Sys. v. Amedisys, Inc., 769 F.3d 313, 323 (5th Cir. 2014) (stating that “[C]ommencement of

government investigations on suspected fraud do not, standing alone, amount to a corrective

disclosure.”); Meyer, 710 F.3d at 1201 (“[T]he commencement of an SEC investigation, without

more, is insufficient to constitute a corrective disclosure for purposes of § 10(b).”); Loos v.

Immersion Corp., 762 F.3d 880, 890 (9th Cir. 2014) (stating that “the announcement of an

investigation, without more, is insufficient to establish loss causation”). Moreover, the alleged

misrepresentations on which Plaintiff relies to construct its securities fraud claims are all generic,

forward-looking statements concerning Key’s overall business in Russia and Mexico, or mere

puffery concerning Key’s internal controls. None of the alleged statements constitutes a

guarantee that FCPA investigations or violations would never occur in connection with Key’s

activities in these regions, or that Key’s internal controls were foolproof. In fact, none of the

statements even relate to the FCPA, except for those where Key was either attempting to prevent

such violations or warning that such violations could occur despite its compliance efforts.

Statements such as these cannot be deemed corrective. See Archdiocese, 597 F.3d at 340

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(statements about the materialization of risks that the Company previously disclosed and warned

against are not corrective disclosures).

Because the disclosures concerning FCPA investigations into Key’s affairs in

Russia and Mexico are entirely disconnected from the alleged misrepresentations in the CAC, the

statements are not corrective disclosures, and the CAC must be dismissed for failure to plead loss

causation. See, e.g., Greenberg v. Crossroads Sys., Inc., 364 F.3d 657, 667 (5th Cir. 2004)

(holding that alleged corrective disclosure was not sufficiently related to prior allegedly false

statements on speed of new routers, as the disclosure “makes no reference to increased router

speed”); id. at 668 (holding that alleged corrective disclosure reporting problems with third

quarter earnings not related to allegedly false prior statements about first and second quarter

earnings, as the disclosure made “no reference at all” to the first or second quarters); Magruder

v. Halliburton Co., No. 3:05-CV-1156-M, 2009 WL 854656, at *15 (N.D. Tex. Mar. 31, 2009)

(holding loss causation not pleaded because “[d]espite the myriad of statements identified in the

subject [CAC], the Plaintiffs simply fail to connect the alleged misrepresentations with

correlative corrective disclosures during the Class Period. A corrective disclosure, at a minimum,

requires that the prior misrepresentation be identified, and that the fraud of the prior

representation be revealed to the market.”); In re Dell, 591 F. Supp. 2d at 909 (“The

disappointing earnings or expected earnings statements identified by the Plaintiffs fail to reveal

the falsity of any of Dell’s prior representations, and therefore do not qualify as a corrective

disclosure.”).

D. The CAC’s Section 20(a) claims also must be dismissed.

Section 20(a) claims for control person liability are derivative of primary claims

under Section 10(b), and when there is no viable Section 10(b) claim, there can be no

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Section 20(a) claim. See, e.g., Shaw, 537 F.3d at 545. Since the Section 10(b) claims must be

dismissed, so must the Section 20(a) claims.

V. CONCLUSION

For these reasons, Defendants respectfully request that the Court dismiss the CAC

with prejudice.

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Dated: April 14, 2015

Of Counsel: Danny David Texas Bar No. 24028267 Amy Pharr Hefley Texas Bar No. 24046046 BAKER BOTTS L.L.P. One Shell Plaza 910 Louisiana St. Houston, Texas 77002 Tel: (713) 229-1234 Fax: (713) 229-1522 [email protected] [email protected]

Respectfully submitted, BAKER BOTTS L.L.P. By: /s/ David D. Sterling_________ David D. Sterling Attorney-In-Charge Texas Bar No. 19170000 Federal I.D. No. 07079 One Shell Plaza 910 Louisiana St. Houston, Texas 77002 Tel: (713) 229-1946 Fax: (713) 229-7946 [email protected] COUNSEL FOR DEFENDANTS KEY ENERGY SERVICES, INC., RICHARD J. ALARIO, J. MARSHALL DODSON AND NEWTON W. “TREY” WILSON III

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CERTIFICATE OF SERVICE

I hereby certify that a true and correct copy of the foregoing document was served via ECF and/or electronic mail on all counsel of record on this 14th day of April, 2015.

/s/ Amy Pharr Hefley__________ Amy Pharr Hefley

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