HOUSTON – A judge for the U.S. District Court for the Southern District of Texas has dismissed a securities class-action suit against Flotek Industries.
The lawsuit’s plaintiffs alleged that Flotek had purposefully manipulated data provided by third-parties to exaggerate the efficacy of some of its products. Flotek, however, argued that the third party was to blame for the incorrect information and that its use of the information was the result of “control deficiencies” rather than any willful intent to defraud investors.
“The PSLRA (Private Securities Litigation Reform Act) requires that the plaintiff’s complaint must also allege with particularity why each one of the defendants’ representations or omissions was misleading, and second, allege with particularity those facts giving rise to a ‘strong inference’ that the defendant acted with the required state of mind under the federal securities laws,” Greg Weselka, an attorney with Dallas law firm Glast, Phillips & Murray, told The Record.
Judge Alfred H. Bennett in his March 30 ruling found that “Though plaintiffs have pleaded facts establishing a permissible inference of scienter, they have failed to establish a compelling inference.”
“Most motions to dismiss by the defendants focus on ‘scienter,’ which is the state of mind that the PSLRA requires allegations that give rise to a strong inference that each defendant acted either intentionally or recklessly,” Weselka further clarified. “In other words, there may not have been any manipulation but the court assumed there was since the plaintiffs alleged it, but the plaintiffs did not sufficiently allege any facts to create a strong inference that defendants did so with the requisite state of mind (intentionally or recklessly).”
The plaintiffs also claimed that Flotek’s alleged actions amounted to securities fraud. Bennett, however, concluded that because scienter had not been shown to apply to the company as a whole, it could not be applied to its employees as individuals either.
It is not unusual for such cases to be dismissed at this stage.
“In many federal securities cases, the case is decided on the motion to dismiss stage,” explained Weselka. “If the defendants win on the motion to dismiss stage, the case goes away. If the plaintiffs get past the motion to dismiss stage, the case has a good chance of settling… The number of cases actually tried since the PSLRA was enacted and even before are quite small.”