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Lance Teague, Individually and On Behalf of All Others Similarly v. Alternate Energy Holdings

December 19, 2011


The opinion of the court was delivered by: B. Lynn Winmill Chief Judge United States District Court



Before the Court is defendants' Motion to Dismiss Amended Complaint (Dkt. 31). The Court has determined oral argument would not significantly assist the decisional process and will decide the motion without a hearing. For the reasons expressed below, the Court will deny the motion to dismiss, as well as defendants' alternative request to stay this matter.


Lead plaintiff Jerry Pehlke, Jr. represents a putative class of investors who purchased Alternate Energy Holdings, Inc. stock during the period October 23, 2006 through December 14, 2010.*fn1

Plaintiffs describe Alternate Energy as a company that "purports to operate in the electric power generation industry by acquiring and developing nuclear plant sites and obtaining licenses for their construction and operation throughout the United States, especially Idaho." Amended Complaint (FAC),Dkt. 29 ¶ 5 (emphasis added). On December 14, 2010 -- roughly four years after the company went public -- the SEC temporarily suspended trading of Alternate Energy common stock. Two days later, the SEC filed a securities fraud complaint, alleging that Alternate Energy is a sham operation with "no realistic possibility of building a multi-billion dollar nuclear reactor." SEC Compl., Case No. 1:10-cv-621-EJL-REB (D. Idaho), Dkt. 1, ¶ 1.*fn2 Plaintiff filed this action on December 20, 2011. FAC ¶¶ 120, 122.

The SEC and plaintiffs in this case allege substantially the same misconduct. Most significantly, both allege that defendants engaged in two primary schemes to artificially inflate the price of Alternate Energy's stock: (1) improper use of stock promoters; and (2) false press releases.

Regarding stock promoters, plaintiffs allege that individual defendant Donald Gillispie "knowingly ordered stock promoters to manipulate the stock price by ordering them to buy company stock at the end of certain trading days so as to artificially inflate the stock's price and trading volume." FAC ¶ 42; see also SEC Compl. ¶¶ 2, 16. Plaintiffs flesh out this allegation with summaries of various email communications between individual defendant Donald Gillispie and stock promoter Billy Harbour. One such communication is described as follows:

On January 17, 2007, Gillispie sent an email to Harbour, which stated: "Billy . . . .there is no evidence you have been buying stock today or any day recently at $1,00 or higher . . . I had someone buy 100 shares this morning at $1.20 and the stock jumped to that price accordingly . . . and then drifted down to 96 cents . . . please don't lie to me about this any more . . . it does not help in rebuilding your character now . . . ."

FAC ¶ 48.

The second major category of alleged misconduct involves false press releases. Plaintiffs allege that in September 2010, Gillispie caused Alternate Energy to release two press releases stating that no company director or "line officer" had ever sold any of their Alternate Energy shares. See FAC ¶ 62; SEC Compl. ¶¶ 19-20. But defendant Jennifer Ransom, a senior vice president of the company, sold one million shares between June and September 2010, and Gillispie allegedly sold some of his own shares through nominees. FAC ¶ 65-71; SEC Compl. ¶¶ 21, 25.

Plaintiffs also allege that another press release falsely stated that the company had not paid Pinnacle Digest to recommend its stock. FAC ¶ 104; see SEC Compl. ¶ 34.

In addition to the press releases and improper use of stock promoters, plaintiffs allege that defendants materially understated Gillispie's and Ransom's compensation on the 2009 10-K, FAC ¶¶ 92-103; see also SEC Compl. ¶¶ 30-33.

In the SEC action, on December 16, 2010, the Court granted the SEC's ex parte application to freeze Alternate Energy's assets. Two months later, in February 2011, the Court entered a stipulated order lifting the asset freeze.

Meanwhile, on December 29, 2010, the SEC lifted its suspension, allowing Alternate Energy's stock to resume trading. The share price plunged. On December 13, 2010 -- the day before the SEC suspended trading -- Alternate Energy's stock closed at $.58 per share. On December 29, it opened at 6 cents per share and closed at 8 cents per share -- thus losing over 85 percent of its value in a single day.

Plaintiffs focus on this drastic price drop to support their theory that defendants' fraudulent conduct caused their losses. As they put it, Alternate Energy's "stock price dropped catastrophically because the market became aware of the SEC's allegations that the Defendants knowingly or recklessly engaged in a fraudulent scheme and made materially false and misleading statements, as alleged in the Amended Complaint." FAC ¶ 126.


Plaintiffs allege defendants violated section 10(b) of the Exchange Act of 1934 and SEC Rule 10b-5. Section 10(b) makes it unlawful to "use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). The scope of Rule 10b-5 is coextensive with that of Section 10(b). SEC v. Zandford, 535 U.S. 813, 815 n.1 (2002). "In a typical § 10(b) private action a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Stoneridge Inv. Partners, LLC v. Scientific-- Atlanta, Inc., 552 U.S. 148, 156 (2008) (citation omitted).

This motion focuses on the sixth element of a Section 10(b) violation -- loss causation. Loss causation is the causal connection between a defendant's material misrepresentation and a plaintiff's loss. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 344-45 (2005). "A plaintiff bears the burden of proving that a defendant's alleged unlawful act 'caused the loss for which the plaintiff seeks to recover damages.'" In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (quoting 15 U.S.C. § 78u-- 4(b)(4)).

In Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 344-45 (2005), the Supreme Court held that a person who misrepresents the financial condition of a corporation in order to sell stock is only liable to a relying purchaser for the loss the purchaser sustains when the facts "become generally known" and "as a result" share value depreciates. To adequately plead loss causation, the Court held, a plaintiff must allege that the "share price fell significantly after the truth became known." Id. at 347.

1. Intervening Cause

Alternate Energy argues that plaintiffs' efforts to allege loss causation are doomed because even assuming the market learned of and reacted negatively to the frauds alleged in the complaint, there are at least two intervening causes for the price drop: (1) the SEC's "reckless" conduct in December 2010, and (2) the ...

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