Pomerantz, together with Co-Counsel, defeated the defendants’ attempt to dismiss a securities fraud complaint against New Fortress Energy, Inc. (“NFE”) and its senior executives concerning misrepresentations made about the construction status and timeline of NFE’s floating liquefied natural gas project (“FLNG1”) in Altamira, Mexico. The case alleges that the defendants, in the beginning of the Class Period, created a mirage of progress at an investor day by falsely presenting an unfinished main turbine as substantially complete. NFE also allegedly shipped FLNG1 offshore, knowing that construction was incomplete, but told investors the exact opposite.
According to multiple confidential witness accounts obtained by Pomerantz and Co-Counsel, difficulties with meeting FLNG1’s construction targets only worsened with time, causing NFE to repeatedly shift timelines for the project’s completion. The defendants failed to disclose these adverse facts. Instead, they represented to investors that everything was on track and on budget, even as mechanical completion dates slipped from March 2023 to August 2024. When the truth emerged about the reasons for the delays, the company’s share price plummeted from nearly $60 a share at the beginning of the Class Period to less than $15 a share by its end.
The Court’s decision to deny dismissal of the claims rejected every single argument the defendants raised. The Court found that the safe harbor protection under the PSLRA – which shields companies from legal claims arising from their forward-looking statements that turn out to be inaccurate – does not apply to current misrepresentations of fact or omissions of material fact, even if the statement rendered misleading by the omission was forward-looking. It rejected the defendants’ contentions that the defendants’ misrepresentations amounted to mere puffery or were otherwise inactionable opinions. The Court also concluded that the plaintiffs adequately pled scienter – i.e., intent to deceive, manipulate or defraud – based on both the defendants’ conscious misbehavior and a motive to commit fraud.
Conscious misbehavior is pled by showing that a defendant: (1) knew facts or had access to information suggesting the representations it made were false or misleading; (2) engaged in illegal activity; or (3) failed to check information that the defendant was obligated to monitor. Most securities fraud complaints rely and are sustained on the first point, with the second and third very rarely invoked. Without a motive, conscious misbehavior must be pled such that the strength of the circumstantial allegations is correspondingly greater. Here, the plaintiffs succeeded in meeting the first point based on the accounts of multiple confidential witnesses as well as the fact that FLNG1 is of paramount importance to the defendants. Many confidential witnesses had hands-on experience with FLNG1’s construction, and some provided particularized facts of the defendants’ state of mind.
On paper, conscious misbehavior seems harder to plead than motive. That is why plaintiffs rely on multiple factors to convince a court of the pleading’s sufficiency, bolstering claims, when they can, with the accounts of former employees, reviewing all public information to identify a defendant’s statements of knowledge or admissions of adverse facts, and sometimes hiring experts to explain to a court why, given the nature of a company’s business or the industry, a defendant would understand that his or her representations to investors were false.
However, in practice, despite its simplicity, the motive to commit fraud poses the most significant obstacle for a plaintiff to plead scienter at the preliminary stage of litigation. This is because, since the passage of the Private Securities Litigation Reform Act in 1995, the federal courts have been dismissive towards a plaintiff’s allegations of motive, often refusing to sustain complaints even when excessive and suspect executive compensation could be apparent to a lay person. Except for rare cases involving large, suspiciously timed stock sales, motive allegations based on other forms of compensation, including bonuses, are routinely rejected. The Court’s decision in NFE is thus a refreshing change from this unfortunate trend.
In the beginning of the Class Period, NFE boosted the hype around FLNG1 by raising its earnings target from $1.5 billion to over $2.5 billion and approving a radically different dividend policy that increased declared dividends from $0.10 per share to $3.00 per share. In January 2023, NFE issued a $3.00 dividend in the amount of approximately $626 million. This was the one and only time that NFE ever paid a $3.00 dividend. At the time of the January 2023 dividend, NFE’s CEO owned and/or beneficially controlled over 72.6 million shares of NFE’s common stock. This allowed him to control NFE’s board of directors to approve the dividend, and to reap massive personal proceeds from the dividend payment. Given his ownership of stock, the January 2023 dividend resulted in NFE’s CEO receiving a cash payment of approximately $217 million, personally pocketing about 35% of every dollar the dividend paid out. The investor interest that the CEO created in FLNGI caused NFE to be overvalued, making possible the oversized dividend payment.
The Court ruled that the facts pled by the plaintiffs were more than sufficient to allege a concrete and particularized benefit to plead motive because of the size and timing of the dividend distribution and the enormous windfall that benefited NFE’s CEO. To our knowledge, this is the first time that a court in the Second Circuit has correctly ruled that the payment of extraordinary dividends alone can be sufficient to plead a strong inference of fraud. Multiple decisions in the Southern District of New York had ruled the opposite before. Yukos Oil Company, a decision heavily relied upon by the defense bar, including in this litigation, is illustrative. There, the defendants collectively received $1.2 billion in dividends, but the district court dismissed the complaint, finding that the defendants benefited in the same way as all shareholders who also received dividends. But that was not true. Ordinary shareholders of companies do not receive over a billion dollars in dividends.
Nor did the plaintiffs and other ordinary shareholders of NFE receive such a windfall. A court in the Southern District of New York has finally recognized what should have been obvious all along: an executive engineering a $217 million personal windfall through hype he himself created is not an ordinary shareholder – He is the fraud. The Court’s decision in NFE should become settled law in the Second Circuit.
The case is now in discovery. Bolstered by the accounts of confidential witnesses with intricate knowledge of FLNG1 and public information alone, the complaint was strong enough to defeat dismissal on every ground. The ruling on the motion to dismiss was rare not only in upholding allegations of a motive to commit fraud, but rarer still for doing so on facts that courts had previously refused to credit. The plaintiffs expect discovery to sharpen what already appears to be a compelling case.