     Case: 13-20519   Document: 00512699417     Page: 1   Date Filed: 07/15/2014




         IN THE UNITED STATES COURT OF APPEALS
                  FOR THE FIFTH CIRCUIT
                                                               United States Court of Appeals
                                                                        Fifth Circuit

                                                                       FILED
                                 No. 13-20519                        July 15, 2014
                                                                 Lyle W. Cayce
PAUL SPITZBERG; STEPHEN GERBER,                                       Clerk


                                           Plaintiffs - Appellants
v.

HOUSTON AMERICAN ENERGY CORPORATION; JOHN F.
TERWILLIGER; JAY JACOBS; E. HOWARD KING, JR.; J. ALEX LOFTUS;
O. LEE TAWES, III; EDWIN C. BROUN, III; STEPHEN HATTZELL; JOHN
BOYLAN; RICHARD J. HOWE; KENNETH A. JEFFERS,

                                           Defendants - Appellees


                Appeal from the United States District Court
                     for the Southern District of Texas


Before DAVIS, ELROD, and COSTA, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
      In this case, Plaintiffs-Appellants have sued Defendants-Appellees in a
private action for securities fraud under § 10(b) of the Securities Exchange Act
of 1934, codified at 15 U.S.C. § 78j(b), and Rule 10b-5, codified at 17 C.F.R. §
240.10b-5. Accordingly, Plaintiffs-Appellants are obliged under the Private
Securities Litigation Reform Act (“PSLRA”) to conform the allegations in their
complaint to the heightened pleading requirements set forth at 15 U.S.C. §
78u-4.   Arguing that Plaintiffs-Appellants failed to meet these standards,
Defendants-Appellees filed a motion to dismiss on January 14, 2013.
      On August 22, 2013, the district court granted Defendants-Appellees’
motion on two grounds. First, the district court concluded that Plaintiffs-
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                                       No. 13-20519
Appellants’ allegations did not support a sufficiently strong inference of
Defendants-Appellees’ scienter under 15 U.S.C. § 78u-4(b)(2). Second, the
district court concluded that Plaintiffs-Appellants failed to allege that
Defendants-Appellees’ “misstatements or omissions were the actual cause of
[Plaintiffs-Appellants’] economic loss as opposed to other explanations, e.g.,
changed economic circumstances” under 15 U.S.C. § 78u-4(b)(4). On appeal,
Plaintiffs-Appellants argue that the district court erred on both grounds.
        In response, Defendants-Appellees argue that both of the district court’s
grounds for dismissal were proper. Moreover, in Defendants-Appellees’ view,
the district court’s judgment should also be upheld on three alternative
grounds. First, Defendants-Appellees argue that Plaintiffs-Appellants failed
to plead the falsity of Defendants-Appellees’ statements with sufficient
particularity under 15 U.S.C. § 78u-4(b)(1). Second, Defendants-Appellees
argue that the safe harbor provision for forward-looking statements under 15
U.S.C. § 78u-5 should be applied to certain of Defendants-Appellees’ allegedly
false statements. Third, Defendants-Appellees argue that the two-year statute
of limitations under 28 U.S.C. § 1658(b)(1) had run with respect to certain of
Defendants-Appellees’ allegedly false statements.
        As explained below, we reverse and remand.                 While some or all of
Defendants-Appellees’ factual arguments may ultimately prevail based on the
evidence presented during later stages of these proceedings, the complaint was
sufficiently pled under 15 U.S.C. § 78u-4 and § 78u-5. As for the running of
the statute of limitations under 28 U.S.C. § 1658(b)(1), the district court was
correct to conclude that this issue could not be decided on a motion to dismiss
in the present case. 1


   1 The district court also correctly reasoned that Plaintiffs-Appellants’ claim for control
person liability under 15 U.S.C. § 78t cannot proceed in the absence of a primary violation of
the securities laws. See Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353,
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                                       No. 13-20519
                                               I.
         Plaintiffs-Appellants are investors who allege that they purchased
Defendants-Appellees’ stock in reliance on Defendants-Appellees’ material
misrepresentations between November 9, 2009, and April 18, 2012.
Defendants-Appellees include a small company named Houston American
Energy Corporation, two of this company’s three employees, and a number of
other individuals who sat as directors of the company. One of the company’s
principal activities was the development of an oil-and-gas concession in
Colombia.      The company did not conduct its own drilling operations, but
worked instead through a business partner, SK Innovation/SK Energy, which
is not a party to this lawsuit. Plaintiffs-Appellants allege that they were
injured by the fall in stock prices when Defendants-Appellees’ statements
regarding the oil-and-gas concession in Colombia were publicly revealed to be
false.
         The first allegedly fraudulent statement at issue in this case pertained
to one of the hydrocarbon blocks in Colombia, known as the “CPO 4 Block,” in
which Defendants-Appellees owned an interest. The statement occurred in a
slide presentation given by Defendants-Appellees in November 2009. A copy
of the slide presentation was appended to Defendants-Appellees’ Form 8-K
disclosure filed with the Securities and Exchange Commission (“SEC”) on
November 9, 2009. In its entirety, the challenged statement in Defendants-
Appellees’ slide presentation reads as follows: “CPO 4 Block consists of 345,452
net acres and contains over 100 identified leads or prospects with estimated
recoverable reserves of 1 to 4 billion barrels[.]” In Plaintiffs-Appellants’ view,



383 (5th Cir. 2004) (“Control person liability is secondary only and cannot exist in the absence
of a primary violation.”). Because we hereby reverse the district court’s judgment with
respect to scienter and loss causation under 15 U.S.C. § 78u-4, the district court’s decision
regarding control person liability is also reversed.
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                                   No. 13-20519
Defendants-Appellees’ use of the term, “reserves,” communicated to investors
that certain geological testing had been completed based on the definition of
“reserves” used by the oil industry and by SEC regulations.
        As explained in a release published by the SEC on January 14, 2009,
many of the “reserves definitions” that must be used in regulatory disclosures
filed with the SEC are “designed to be consistent with the Petroleum Resource
Management System (PRMS).” 2 Apart from its significance for regulatory
purposes, the PRMS is also “a widely accepted standard for the management
of petroleum resources developed by several industry organizations.” 3
According to Plaintiffs-Appellants, the PRMS states that a reservoir of
hydrocarbons can        only constitute       “reserves” where    the “commercial
productibility” of the reservoir is “supported by actual production or formation
tests.”    Plaintiffs-Appellants argue, therefore, that the statement made
regarding “reserves” in Defendants-Appellees’ slide presentation would have
communicated to investors that either “actual production” or “formation tests”
had already occurred on the CPO 4 Block. As Defendants-Appellees concede,
however, no actual production had occurred in connection with Defendants-
Appellees’ oil-and-gas concession in Colombia as of November 2009. Moreover,
Defendants-Appellees’ test drilling would not begin until more than a year
after the statement regarding “reserves” was made in the slide presentation.
        Following the slide presentation, Plaintiffs-Appellants allege that online
postings in 2010 by websites providing news on the financial markets, Seeking
Alpha and Sharesleuth, took issue with Defendants-Appellees’ statement
regarding “reserves.”      As quoted in Plaintiffs-Appellants’ complaint, the
Sharesleuth      posting   observed     that     Defendants-Appellees’      “investor


   2 SEC, Modernization of Oil and Gas Reporting, 74 Fed. Reg. 2158, 2160 (January 14,
2009).
   3 Id. at 2160 n.15.

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                                 No. 13-20519
presentation and subsequent Securities and Exchange Commission filing” had
claimed that Defendants-Appellees’ oil-and-gas concession contained more
“recoverable reserves” than “all of Colombia,” which was “one of the most
audacious claims by any of the energy companies operating in that country.”
      As Defendants-Appellees emphasize, however, the slide presentation
does not explicitly represent that any drilling had yet occurred on the CPO 4
Block. The only references to drilling in connection with the CPO 4 Block in
the slide presentation are ambiguous. The first is a brief note identifying “2
Exploration Wells” as a “Work Obligation” during “Phase 1” of the project and
identifying “3 Exploration Wells” as a “Work Obligation” during “Phase 2” of
the project. The second is an item in the budget “through December 2010” set
forth in the slide presentation, which allocated funding for “2 Well Prep.”
Based on these sparse references, Defendants-Appellees argue that “no
investor would understand or did understand the term ‘reserves’ to mean
‘reserves’ as defined by the PRMS.”        As counsel for Defendants-Appellees
stated before this court during oral argument, “wells aren’t drilled in secret”
and “if there had been wells drilled . . . you would have told about the wells
drilled in the presentation.” As is also relevant, and as is discussed below in
further detail, the slide presentation also contained a lengthy disclaimer
regarding its use of certain terms that were prohibited in ordinary SEC filings.
      The remaining allegedly fraudulent statements were all made during the
period after test drilling began in July 2011 and before Plaintiffs-Appellants
filed their complaint in this lawsuit in April 2012. In a number of regulatory
filings and press releases, Defendants-Appellees repeatedly stated that the
test well known as “Tamandua #1” on their oil-and-gas concession had
produced “strong inflow[s]” and “significant shows” of both “gas and oil.” For
example, in a Form 8-K filing on October 5, 2011, Defendants-Appellees stated
that they had experienced a “strong inflow of hydrocarbons” and “strong shows
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                                  No. 13-20519
of hydrocarbons (gas and oil) in the first objective sand, the C-7.” Again, in a
Form 10-Q filing on November 8, 2011, Defendants-Appellees stated that “the
well encountered indications of oil and a significant amount of associated gas
from the uppermost pay sand expected in the well (the C-7) between the
interval of approximately 12,200 feet to 12,500 feet.”
      But according to the statements of confidential witnesses that were
allegedly involved in the drilling operations, the test well at Tamandua #1
produced no “inflow[s]” or “shows” of oil or “flowable hydrocarbons” during test
drilling.   These statements are quoted and cited extensively in Plaintiffs-
Appellants’ complaint.     Specifically, the complaint refers to a confidential
witness designated as “CW 3,” who “was the management representative from
SK Innovation Co. on the Partners’ management committee that made the
decisions about the exploration, drilling and production of the wells in the CPO
4 block” in Colombia. The complaint characterizes CW 3’s testimony as follows:
“According to CW 3, neither oil nor flowable hydrocarbons were found in the
Tamandua #1 well.” The complaint also states that, “as CW 3 described the
situation, it was not ‘factual’ or accurate to represent that the well had
exhibited ‘oil.’”    During oral argument before this court, counsel for
Defendants-Appellees discounted the relevance of all other confidential
witnesses mentioned in Plaintiffs-Appellants’ complaint, because their
testimony was based on rounds of well testing that were performed at a date
subsequent to the allegedly false disclosures.        Counsel for Defendants-
Appellees conceded, however, that CW 3’s testimony is relevant because he was
“around at the time.”
      Several events occurring in early 2012 are also relevant to the district
court’s decision in this case. In “February 2012 or March 2012,” Defendants-
Appellees decided to conduct a second well test at Tamandua #1. Although
Defendants-Appellees’ business partner, SK Innovation, had assisted
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                                 No. 13-20519
Defendants-Appellees throughout the first round of well testing at Tamandua
#1, SK Innovation declined to assist with the second round of testing.
Defendants-Appellees therefore conducted the second well test “on a ‘sole risk
basis,’ meaning that they would pay themselves to do it.”           As context,
Defendants-Appellees spent “approximately $5 million” to conduct the second
well test, whereas approximately “$30 million to $50 million” had been spent
on the drilling operations and first round of well testing between July 2011 and
January 2012.
      When the second well test also finally “revealed no flowable
hydrocarbons,” the Defendants-Appellees and SK Innovation decided “to
abandon the well” at Tamandua #1. Defendants-Appellees and SK Innovation
then moved operations to a second site elsewhere on the oil-and-gas concession,
known as “Negretos,” to drill a second test well. There is no indication in the
record as to what was shown by any tests at Negretos or any tests at further
sites within Defendants-Appellees’ oil-and-gas concession. Upon disclosure
that the well at Tamandua #1 would be abandoned, Defendants-Appellees’
stock price “plummeted $1.24 per share, or 35.5%, to close at $2.25 per share
on April 19, 2012.”
      At roughly the same time as the second well test at Tamandua #1, on
February 10, 2012, Defendants-Appellees received subpoenas issued by the
SEC pursuant to a “nonpublic formal order” of investigation in connection with
possible misstatements “in the late 2009 and early 2010 time period regarding
resource potential for the CPO-4 prospect.” It is unclear whether Defendants-
Appellees’ decision to conduct a second well test in February 2012 or March
2012 occurred before or after Defendants-Appellees received the subpoenas
from the SEC on February 10, 2012.
      Plaintiffs-Appellants filed their original complaint in this lawsuit on
April 27, 2012, and a consolidated class action complaint on November 15,
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                                      No. 13-20519
2012. Defendants-Appellees filed a motion to dismiss on January 14, 2013,
which the district court granted on August 22, 2013.
                                             II.
        We review de novo a district court’s analysis of a motion to dismiss. 4 In
general, on a motion to dismiss under Rule 12(b)(6) and Rule 8 of the Federal
Rules of Civil Procedure, both the district court and this court must assess
whether the complaint contains sufficient factual matter, accepted as true, to
state a claim for relief that is plausible on its face under Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 570 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009). 5
        The elements of a private securities fraud claim based on violations of 15
U.S.C.      §   78j(b)   and   17   C.F.R.    §    240.10b-5   are:   “‘(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.’” 6 Under the traditional rule governing allegations of
fraud, Rule 9 of the Federal Rules of Civil Procedure, “a party must state with
particularity the circumstances constituting fraud,” although “[m]alice, intent,
knowledge, and other conditions of a person’s mind may be alleged generally.”
However, as this court held in Indiana Electrical Workers’ Pension Trust Fund
IBEW v. Shaw Group, Inc., 537 F.3d 527, 532-33 (5th Cir. 2008), the PSLRA
heightened the pleading standards for private claims of securities fraud “in two
ways.” That is, plaintiffs must also, first, allege with particularity why each
one of defendants’ representations or omissions was “misleading” under 15


   4  Central Laborers’ Pension Fund v. Integrated Elec. Servs. Inc., 497 F.3d 546, 550 (5th
Cir. 2007).
    5 Hale v. King, 642 F.3d 492, 498-99 (5th Cir. 2011).
    6 Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179, 2184 (2011) (quoting

Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1317 (2011)).
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                                   No. 13-20519
U.S.C. § 78u-4(b)(1) and, second, allege with particularity those facts giving
rise to a “strong inference” that the defendant acted with the required state of
mind under 15 U.S.C. § 78u-4(b)(2).
         On the other hand, as this court emphasized in Lormand v. US Unwired,
Inc., 565 F.3d 228, 267 (5th Cir. 2009), the PSLRA did not create heightened
pleading standards for all six elements of a claim of securities fraud. For
example, the plain text of 15 U.S.C. § 78u-4(b)(4) provides only that “the
plaintiff shall have the burden of proving that the act or omission of the
defendant . . . caused the loss for which the plaintiff seeks to recover damages.”
Nothing in this language expressly or impliedly heightens the standard of
pleading applicable to loss causation. Accordingly, we are “not authorized or
required to determine whether the plaintiff’s plausible inference of loss
causation [under 15 U.S.C. § 78u-4(b)(4)] is equally or more plausible than
other competing inferences, as we must in assessing allegations of scienter
under the PSLRA.” 7
                                        III.
         We first consider Plaintiffs-Appellants’ argument that the district court
erred by misapplying the scienter requirement applicable in a private lawsuit
for securities fraud. Under 15 U.S.C. § 78u-4(b)(2), the plaintiff in such an
action must “state with particularity facts giving rise to a strong inference that
the defendant acted with the required state of mind.” Accordingly, as the
Supreme Court held in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.
308, 324 (2007), the complaint in such an action will survive a motion to
dismiss “only if a reasonable person would deem the inference of scienter
cogent and at least as compelling as any opposing inference one could draw
from the facts alleged.”


   7   Lormand, 565 F.3d at 267.
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                                       No. 13-20519
         In this circuit, “[t]he required state of mind for scienter is an intent to
deceive, manipulate, or defraud or severe recklessness.” 8 As formulated in
Rosenzweig v. Azurix Corp., 332 F.3d 854, 866 (5th Cir. 2003) (citations and
internal quotation marks omitted), and reaffirmed in Indiana Electrical, 537
F.3d at 533:
         [Severe recklessness is] limited to those highly unreasonable
         omissions or misrepresentations that involve not merely simple or
         even inexcusable negligence, but an extreme departure from the
         standards of ordinary care, and that present a danger of
         misleading buyers or sellers which is either known to the
         defendant or is so obvious that the defendant must have been
         aware of it.

For its part, the Supreme Court has explicitly refrained on several occasions
from addressing whether allegations of recklessness are sufficient to satisfy
the scienter requirement under 15 U.S.C. § 78u-4(b)(2). 9 However, as the
Supreme Court observed in Tellabs, 551 U.S. at 319 n.3, “[e]very Court of
Appeals that has considered the issue has held that a plaintiff may meet the
scienter requirement by showing that the defendant acted intentionally or
recklessly, though the Circuits differ on the degree of recklessness required.”
         In the present case, Plaintiffs-Appellants have sufficiently pled
circumstances constituting at least severe recklessness with respect to both
the slide presentation in November 2009 and the statements regarding
Tamandua #1 in 2011 and 2012. To perform this component of our analysis,
we assume for the sake of argument that the industry-specific term, “reserves,”
would indeed communicate to investors that certain production or geological




   8See id. at 251 (quoting Indiana Elec., 537 F.3d at 533 (alterations and internal quotation
marks omitted)).
  9 See Matrixx, 131 S. Ct. at 1323-24; Tellabs, 551 U.S. at 319 n.3.

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                                       No. 13-20519
testing had already been conducted, as Plaintiffs-Appellants allege. 10 We also
recall Defendants-Appellees’ concession that no such production or geological
testing had yet occurred as of November 2009. Under such circumstances,
Defendants-Appellees’ use of this industry-specific term, “reserves,” in the
2009 slide presentation would undoubtedly present an “obvious” danger of
“misleading buyers or sellers” of Defendants-Appellees’ securities as to the
value of the company’s assets. 11 Indeed, as quoted in Plaintiffs-Appellants’
complaint, the Sharesleuth article interpreted this statement regarding
“reserves” to be “one of the most audacious claims by any of the energy
companies operating” in Colombia.
        Likewise, assuming the truth of CW 3’s statement that “neither oil nor
flowable hydrocarbons were found in the Tamandua #1 well,” Defendants-
Appellees’ numerous representations regarding “indications of oil” and “strong
inflow[s] of hydrocarbons” may likewise have been obviously misleading to
investors. At later stages of these proceedings, no doubt, additional evidence
regarding the use of terms such as “flowable,” “inflow,” and “indications of oil”
in the industry may confirm or undermine this factual proposition. At this
stage of an action under Rule 10b-5 and the PSLRA, however, Plaintiffs-
Appellants’ contention about the industry definitions of these terms are “at
least as compelling as any opposing inference one could draw” regarding the
likely understanding of these terms in this context. 12 We therefore conclude
that Plaintiffs-Appellants’ complaint cannot be dismissed under 15 U.S.C. §
78u-4(b)(2) based on the failure to plead severe recklessness.




   10  See Tellabs, 551 U.S. at 322 (“[F]aced with a Rule 12(b)(6) motion to dismiss a § 10(b)
action, courts must, as with any motion to dismiss for failure to plead a claim on which relief
can be granted, accept all factual allegations in the complaint as true.”).
    11 See Indiana Elec., 537 F.3d at 532-33; Rosenzweig, 332 F.3d at 866.
    12 See Tellabs, 551 U.S. at 324.

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                                        No. 13-20519
        In the present appeal, the parties have mistakenly focused on the
presence or absence of a pecuniary motive for Defendants-Appellees to commit
securities fraud. 13 But as the Supreme Court stated explicitly in Matrixx
Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1324 (2011), “[t]he absence of a
motive allegation, though relevant, is not dispositive” under the PSLRA. 14
Even if Defendants-Appellees were unable to benefit financially from their
alleged misrepresentations regarding geological testing (when none had been
conducted) or regarding the presence of oil and flowable hydrocarbons (when
none had been found), such misrepresentations would still be severely reckless
and     dangerous      to    investors. 15     Although      motive     allegations     might
“meaningfully enhance the strength of the inference of scienter,” 16 a strong
inference of severe recklessness does not depend on such an enhancement in
the present case.
        As a final matter, we are unable to adopt the district court’s reasoning
regarding Defendants-Appellees’ decision to conduct a second well test at
Tamandua #1 in February 2012 or March 2012. In the district court’s view,



   13  Defendants-Appellees have also briefly argued that Plaintiffs-Appellants’ complaint
relies impermissibly on “the collective knowledge of all the corporation’s officers and
employees.” See Southland, 365 F.3d at 366. We reject this argument, as the district court
did, due to the extremely small size of the company at issue. As the complaint plausibly
alleges, “[b]y virtue of their positions at Houston American, defendants had actual knowledge
of the materially false and misleading statements and material omissions alleged herein and
intended thereby to deceive Plaintiffs and the other members of the Class, or, in the
alternative, defendants acted with reckless disregard for the truth . . . . As the senior
managers and/or directors of Houston American, the Individual Defendants had knowledge
of the details of Houston American’s internal affairs.”
    14 See also Tellabs, 551 U.S. at 325 (“[T]he absence of a motive allegation is not fatal.”);

Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061, 1068 (5th Cir. 1994) (“Where a defendant’s
motive is not apparent, a plaintiff may adequately plead scienter by identifying
circumstances that indicate conscious behavior on the part of the defendant, though the
strength of the circumstantial allegations must be correspondingly greater.”).
    15 See Lormand, 565 F.3d at 267; Indiana Elec., 537 F.3d at 532-33).
    16 See Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 208

(5th Cir. 2009).
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                                 No. 13-20519
Defendants-Appellees’ decision “to spend another $5 million for more testing
of the well” would “not make sense” if Defendants-Appellees consciously
believed that no oil or gas could be found in the CPO 4 Block. In other words,
the district court could not accept that Defendants-Appellees’ small company
would waste such considerable monetary resources in this way on what
Plaintiffs-Appellants have characterized as “a desperate ‘Hail Mary’ decision.”
The district court therefore concluded that it was unable to draw an inference
under 15 U.S.C. § 78u-4(b)(2) that Defendants-Appellees “knowingly” made the
false statements.
      Even if the district court’s inference regarding the illogic of conducting a
second well test at Tamandua #1 is correct, the district court’s inference fails
to resolve any questions relating to Defendants-Appellees’ scienter. Whether
Defendants-Appellees actually believed that oil could be found in the CPO 4
Block is irrelevant to whether Defendants-Appellees were severely reckless
when they allegedly misled investors regarding previous geological testing in
November 2009. Likewise, Defendants-Appellees’ subjective beliefs regarding
the ultimate potential for the CPO 4 Block are irrelevant to whether
Defendants-Appellees’ statements regarding “indications of oil” and “flowable
hydrocarbons” were factually false and severely reckless in 2011 and 2012.
      Moreover, the facts supporting the district court’s inference regarding
the $5 million spent on the second well test at Tamandua #1 also provide
support to an alternative explanation for Defendants-Appellees’ conduct. By
the time of the second well test in February or March 2012, the two websites,
Seeking Alpha and Sharesleuth, had already heavily criticized Defendants-
Appellees’ statement regarding the CPO 4 Block’s “billion barrels” as
unrealistically audacious.    At roughly this time, on February 10, 2012,
Defendants-Appellees also received subpoenas issued by the SEC pursuant to
a “nonpublic formal order” of investigation in connection with possible
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                                 No. 13-20519
misstatements “in the late 2009 and early 2010 time period regarding resource
potential for the CPO-4 prospect.”
      Based on this pressure from the media and regulators, Defendants-
Appellees may have felt the need to substantiate the allegedly irresponsible
statements they had made previously. In Makor Issues & Rights, Ltd. v.
Tellabs Inc., 513 F.3d 702, 710 (7th Cir. 2008), Judge Posner analogized
corporate decisions of this kind to “embezzling in the hope that winning at the
track will enable the embezzled funds to be replaced before they are discovered
to be missing.”
      This interpretation of Defendants-Appellees’ actions also might explain
the decision by SK Innovation not to participate in the second well test. SK
Innovation was not accountable for any of Defendants-Appellees’ statements
to investors, had not been criticized by Seeking Alpha or Sharesleuth, and may
not even have been aware of the SEC’s subpoenas. SK Innovation therefore
may not have felt any increased pressure to assist with Defendants-Appellees’
“desperate ‘Hail Mary’ decision” to conduct a second well test.
      Accordingly, even if the district court’s interpretation of these events
does support a strong inference as to a lack of scienter, 15 U.S.C. § 78u-4(b)(2)
is nonetheless satisfied in the present case because the competing inference of
severe recklessness is at least as cogent and compelling. As recognized by this
court in Lormand, 565 F.3d at 254 (analyzing Tellabs, 551 U.S. at 324), where
there are competing inferences that establish or negate the scienter
requirement, “a tie favors the plaintiff” on a motion to dismiss under 15 U.S.C.
§ 78u-4(b)(2). For these reasons, the district court erred by granting the motion
to dismiss based on Plaintiffs-Appellants’ failure to plead scienter.
                                      IV.
      The district court also erred by granting the motion to dismiss based on
Plaintiffs-Appellants’ failure to allege loss causation under 15 U.S.C. § 78u-
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                                      No. 13-20519
4(b)(4).   According to the district court, Plaintiffs-Appellants’ complaint
warranted dismissal because it did not allege specifically “whether the alleged
misstatements or omissions were the actual cause of their economic loss as
opposed to other explanations, e.g., changed economic circumstances or
investor expectations or industry-specific facts.” However, the only authority
cited by the district court in support of its reasoning, Dura Pharmaceuticals,
Inc. v. Broudo, 544 U.S. 336 (2005), does not require this conclusion. Although
the Supreme Court’s decision in Dura, 544 U.S. at 346, does address the need
for plaintiffs to plead loss causation under 15 U.S.C. § 78u-4(b)(4), the Supreme
Court explicitly declined to address whether any heightened pleading
requirement applies to this element of a securities fraud claim. Indeed, as
described above, the plain text of 15 U.S.C. § 78u-4(b)(4) does not indicate that
it imposes any heightened standard, or make any mention of a “particularity”
requirement with respect to loss causation.
        Moreover, as this court held in Lormand, 565 F.3d at 267, and as the
Eighth Circuit has also previously held, 17 the courts are “not authorized or
required to determine whether the plaintiff’s plausible inference of loss
causation is equally or more plausible than other competing inferences, as we
must in assessing allegations of scienter under the PSLRA.” The district
court’s decision, therefore, is directly contrary to this circuit’s precedent and
must be reversed.
        In fact, Plaintiffs-Appellants alleged in plain language that they
purchased stock at prices that were artificially inflated because of Defendants-
Appellees’ misrepresentations regarding the CPO 4 Block’s resource potential,



   17 See Gebhardt v. ConAgra Foods, Inc., 335 F.3d 824, 830 n.3 (8th Cir. 2003) (“The
complaint’s allegations of misconduct are involved here only as they relate to the questions
of materiality and loss causation. The new statute does not change traditional pleading rules
with respect to these issues.”).
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                                  No. 13-20519
and that the market price of the stock declined after the abandonment of
Tamandua #1 was announced. As explained by the complaint:
      [Plaintiffs-Appellants], relying on the materially false and
      misleading statements described herein, which the defendants
      made, issued or caused to be disseminated, or relying upon the
      integrity of the market, purchased shares of Houston American
      securities at prices artificially inflated by defendants’ wrongful
      conduct. Had [Plaintiffs-Appellants] known the truth, they would
      not have purchased said securities, or would not have purchased
      them at the inflated prices that were paid. At the time of the
      purchases by [Plaintiffs-Appellants], the true value of Houston
      American securities was substantially lower than the prices paid
      by [Plaintiffs-Appellants]. The market price of Houston American
      securities declined sharply upon public disclosure of the facts
      alleged herein to the injury of [Plaintiffs-Appellants].

The complaint also carefully identifies the amount by which the stock price
dropped in 2012 after Tamandua #1 was abandoned: “On this debilitating
news, [Defendants-Appellees’] stock price plummeted $1.24 per share, or
35.5%, to close at $2.25 per share on April 19, 2012.”
      As the Supreme Court explained in Dura, 544 U.S. at 344 (quoting the
Restatement (Second) of Torts § 548A, Comment b, at 107), the “judicial
consensus” is that “a person who ‘misrepresents the financial condition of a
corporation in order to sell its stock’ becomes liable to a relying purchaser ‘for
the loss’ the purchaser sustains ‘when the facts . . . become generally known’
and ‘as a result’ share value ‘depreciate[s].’” Because Plaintiffs-Appellants
sufficiently alleged a similar set of circumstances, Plaintiffs-Appellants’
complaint does not warrant dismissal under 15 U.S.C. § 78u-4(b)(4).              In
accordance with Lormand, 565 F.3d at 266-67, although actual loss causation
must eventually be proven by a preponderance of the evidence under this
provision, the PSLRA does not obligate a plaintiff to deny affirmatively that
other factors affected the stock price in order to defeat a motion to dismiss.

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                                         No. 13-20519
        As a final matter, Defendants-Appellees have also argued that their
announcements regarding the abandonment of Tamandua #1 cannot satisfy
the “corrective disclosure” requirement that many courts have relied upon to
demonstrate loss causation. 18            Indeed, in Dura, 544 U.S. at 342-43, the
Supreme Court reasoned that a corrective disclosure is one that contains
“relevant truth” with a logical link to the ultimate drop in stock price, and that
merely “[t]o ‘touch upon’ a loss is not to cause a loss, and it is the latter that
the law requires.” Accordingly, as Defendants-Appellees correctly observe, the
applicable standard in this circuit under Lormand, 565 F.3d at 256 n.20, is
that a corrective disclosure must “make the existence of the actionable fraud
more probable than it would be without that alleged fact (taken as true).” 19
        That requirement is satisfied by the purported corrective disclosure in
this case. Defendants-Appellees are no doubt correct that Tamandua #1 may
ultimately have been abandoned anyway, regardless of the truth of the
challenged statements. Even if the well was encountering “strong inflow[s]”
and “significant shows” of both “gas and oil” in October and November 2011, it
may nonetheless have become apparent to Defendants-Appellees by April 2012
that Tamandua #1 was not commercially viable. It may even be conceivable
that, if the CPO 4 Block did have “estimated recoverable reserves of 1 to 4
billion barrels” in November 2009, further geological testing might have
revealed by April 2012 that those reserves could not be recovered at Tamandua
#1 by commercially viable means.



   18  See, e.g., In re Williams Sec. Litig., 558 F.3d 1130, 1137 (10th Cir. 2009) (“Loss causation
is easiest to show when a corrective disclosure reveals the fraud to the public and the price
subsequently drops—assuming, of course, that the plaintiff could isolate the effects from any
other intervening causes that could have contributed to the decline.”).
    19 See also Alaska Elec. Pension Fund v. Flowserve Corp., 572 F.3d 221, 230 (5th Cir. 2009)

(“[T]o establish loss causation this disclosed information must reflect part of the ‘relevant
truth’—the truth obscured by the fraudulent statements.”).
                                               17
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                                       No. 13-20519
        Even so, Defendants-Appellees are wrong to suggest that such
possibilities sever completely the logical link between Defendants-Appellees’
earlier statements and the “relevant truth” revealed by the abandonment of
Tamandua #1 under Dura, 544 U.S. at 342-43.                           While the alleged
misrepresentations must do more than merely touch upon the economic loss
caused by a corrective disclosure, Defendants-Appellees have identified no
authority requiring that a corrective disclosure must squarely and directly
contradict the earlier misrepresentations. Indeed, Lormand, 565 F.3d at 256
n.20, explicitly establishes a lower standard. 20 The fact that the well site was
not commercially viable certainly makes it more probable that Defendants-
Appellees’ representations in November 2009 and later in 2011 and 2012 were
false statements. As a matter of common sense, a well that produced shows of
flowable hydrocarbons and oil would be an encouraging signal to investors.
The abandonment of such a well would be less probable than the abandonment
of a well that produced no shows of flowable hydrocarbons and oil. As our
precedent     requires,     therefore,    the      fact   of   the   well’s   abandonment
unquestionably “make[s] the existence of the actionable fraud more probable
than it would be,” had the well site been commercially viable and continued
operations. 21 Accordingly, the news of the well’s abandonment could serve as
a corrective disclosure for the purposes of alleging loss causation.
        For these reasons, Plaintiffs-Appellants have sufficiently pled loss
causation based on the drop in stock price that occurred after the abandonment



   20 See also id. (“If a fact-for-fact disclosure were required to establish loss causation, a
defendant could defeat liability by refusing to admit the falsity of its prior misstatements.
And if a complete corrective disclosure were required, defendants could immunize themselves
with a protracted series of partial disclosures. Thus, to be corrective, a disclosure need not
precisely mirror an earlier misrepresentation.” (internal citations, alterations, and quotation
marks omitted)).
   21 See Lormand, 565 F.3d at 256 n.20.

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                                 No. 13-20519
of Tamandua #1. The district court therefore erred by dismissing Plaintiffs-
Appellants’ complaint under 15 U.S.C. § 78u-4(b)(4).
                                       V.
      We now address Defendants-Appellees’ arguments regarding alternative
grounds for affirming the district court’s judgment, which the district court
either rejected or declined to consider. Initially, Defendants-Appellees argue
that the district court was wrong to conclude that Plaintiffs-Appellants had
alleged misrepresentations with sufficient particularity under 15 U.S.C. § 78u-
4(b)(1). As the district court explained:
      Plaintiffs have specified each statement, the date and place the
      statements were made, who made them or who signed the relevant
      SEC-filed document, and explained why they find that the
      statement was misleading, as required by the PSLRA, 15 U.S.C. §
      78u-4(b)(1) by showing what the real situation in the well drilling
      allegedly was before or at the time each statement was made.

Defendants-Appellees have raised a variety of arguments, however, as to why
the district court erred on this question. We address each of these contentions
in turn.
      First, with respect to the November 2009 slide presentation, Defendants-
Appellees argue that they never explicitly represented that they were using
the PRMS definition of “reserves.” While this is true, Plaintiffs-Appellants
have nonetheless fulfilled the statutory requirement under 15 U.S.C. § 78u-
4(b)(1) to allege “why the statement is misleading” by stating in their complaint
that the PRMS creates a definitional system of “common reference” for
participants in the international petroleum industry.       The SEC’s release
confirms that the PRMS is “a widely accepted standard for the management of
petroleum resources,” which enhances the plausibility of Plaintiffs-Appellants’




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                                        No. 13-20519
allegation. 22 Of course, whether Defendants-Appellees will ultimately prevail
on their argument that “no investor would understand or did understand the
term ‘reserves’ to mean ‘reserves’ as defined by the PRMS” is another matter.
That question can only be answered based on the evidence produced during a
later stage of this litigation.
         Second, Defendants-Appellees argue that the context of the November
2009 slide presentation made clear that Defendants-Appellees had just
acquired its interest in the CPO 4 Block. Accordingly, Defendants-Appellees
explain, any investors would have realized from this context that Defendants-
Appellees’ use of the term, “reserves,” could not mean that any production or
formation testing had already been carried out on the CPO 4 Block. However,
as explained in the passage from the Seeking Alpha article quoted in Plaintiffs-
Appellants’ complaint, Defendants-Appellees’ business partner, SK Energy,
had possessed rights to the concession since 2008, a full year earlier. An
investor might therefore have believed, based on the slide presentation, that
the reference to “reserves” was based on testing performed by SK Energy prior
to Defendants-Appellees’ purchase of an interest in the concession—or, for that
matter, by the previous holder of the rights to the concession.                    As for
Defendants-Appellees’ contention that “wells aren’t drilled in secret” and “if
there had been wells drilled . . . you would have told about the wells drilled in
the presentation,” such an industry-specific and inherently fact-bound
proposition cannot be verified on the face of the pleadings. This argument
therefore provides no basis to find Plaintiffs-Appellants’ complaint deficient
under 15 U.S.C. § 78u-4(b)(1).
         Third, Defendants-Appellees point to the disclaimer in their slide
presentation, in which Defendants-Appellees purportedly communicated to


   22   See Modernization of Oil and Gas Reporting, 74 Fed. Reg. at 2160 n.15.
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                                     No. 13-20519
investors that their use of the term, “reserves,” did not match the definition
used by the SEC for regulatory purposes. In relevant part, the disclaimer
appeared as follows:
         The United States Securities and Exchange Commission permits
         oil and gas companies, in their filings with the SEC, to disclose
         only proved reserves that a company has demonstrated by actual
         production or conclusive formation tests to be economically and
         legally producible under existing economic and operating
         conditions. We use certain terms in this document, such as non-
         proven, resource potential, Probable, Possible, Exploration and
         unrisked resource potential that the SEC’s guidelines strictly
         prohibit us from including in filings with the SEC. These terms
         include reserves with substantially less certainty, and no discount
         or other adjustment is included in the presentation of such reserve
         numbers.

This caveat indeed warns investors that the slide presentation would use
certain terms that “the SEC’s guidelines strictly prohibit . . . from inclu[sion]
in filings with the SEC”—such as “probable” reserves and “possible” reserves.
         But the term, “reserves,” does not itself fall within this caveat, because
the use of this term was not prohibited by the SEC. 23 Nothing in Defendants-
Appellees’ disclaimer suggests that a term that was permitted by the SEC
would be given a different meaning in the slide presentation. Nor did the
caveat suggest that any terms—even those terms that actually were prohibited
by the SEC—would be used in a manner that diverged from the common
understanding in the industry as allegedly set forth in the PRMS. If Plaintiffs-
Appellants are correct that the PRMS term, “reserves,” always communicates
that some instances of actual production or formation tests have taken place,
whether or not accompanied by a modifier such as “proved,” “probable,”
“possible,” or “estimated recoverable,” there is nothing in the slide presentation



   23   See id. at 2167.
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                                        No. 13-20519
to warn investors that Defendants-Appellees were using the term in a different
way. Contrary to Defendants-Appellees’ argument in this appeal, therefore,
the slide presentation’s disclaimer does not make it “abundantly clear” that
the slide presentation’s reference to “1 to 4 billion barrels” of “estimated
recoverable reserves” actually should have been understood as “fall[ing] into
PRMS’s ‘resource’ category, not reserves.”
        Finally, with respect to the reports regarding the well drilled at
Tamandua #1, Defendants-Appellees argue that the statements characterized
by Plaintiffs-Appellants as false under 15 U.S.C. § 78u-4(b)(1) were merely
statements of opinion regarding the strength of hydrocarbon “shows” or
predictions that the well at Tamandua #1 would be commercially viable.
Whether or not Defendants-Appellees are correct, “[f]or securities fraud cases,
‘[a]n opinion or prediction is actionable if there is a gross disparity between
prediction and fact.’” 24 Moreover, according to the complaint’s characterization
of CW 3’s testimony, “neither oil nor flowable hydrocarbons were found in the
Tamandua #1 well” and “it was not ‘factual’ or accurate to represent that the
well had exhibited ‘oil.’” These statements by CW 3 directly conflict with
Defendants-Appellees’ representations during the period from July 2011 until
April 2012. These statements also addressed the objective circumstances at
Tamandua #1 during the period when the representations were being made.



   24 Lormand, 565 F.3d at 248 n.13 (quoting First Va. Bankshares v. Benson, 559 F.2d 1307,
1314 (5th Cir. 1977)); see also Reese v. Malone, 747 F.3d 557, 579 (9th Cir. 2014) (“A statement
of belief is a factual misstatement actionable under Section 10(b) if (1) the statement is not
actually believed, (2) there is no reasonable basis for the belief, or (3) the speaker is aware of
undisclosed facts tending seriously to undermine the statement’s accuracy.” (citation and
quotation marks omitted)); In re Merck & Co., Inc. Sec., Derivative & ERISA Litig., 543 F.3d
150, 166 (3d Cir. 2008) (“We have explained that for misrepresentations in an opinion or
belief to be actionable, plaintiffs must show that the statement was issued without a genuine
belief or reasonable basis . . . .” (citation and internal quotation marks omitted)), aff’d sub
nom. Merck & Co., Inc. v. Reynolds, 559 U.S. 633 (2010); City of Monroe Emps. Ret. Sys. v.
Bridgestone Corp., 399 F.3d 651, 675 (6th Cir. 2005).
                                               22
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                                        No. 13-20519
Accordingly, these statements do not indicate disagreements between the
parties over the validity of an opinion or a prediction.
        Whether or not any of these allegations can be proven during later stages
of this litigation, therefore, Plaintiffs-Appellants have specifically identified
“each statement alleged to have been misleading” and “the reason or reasons
why the statement is misleading” as required under 15 U.S.C. § 78u-4(b)(1).
Accordingly, we reject each of Defendants-Appellees’ arguments regarding the
alleged falsity of their statements in the November 2009 slide presentation and
the disclosures about drilling progress at Tamandua #1.
                                               VI.
        Defendants-Appellees also make two final arguments that are focused
only on the November 2009 slide presentation. First, Defendants-Appellees’
argue that the November 2009 statement is covered by the safe harbor for
forward-looking statements under 15 U.S.C. § 78u-5. In this regard, and in
the absence of any contrary authority, we join the First Circuit, 25 Third
Circuit, 26 and Seventh Circuit in concluding that a “mixed present/future
statement is not entitled to the safe harbor with respect to the part of the
statement that refers to the present.” 27
        As indicated by the PRMS definition of “reserves,” which is quoted in
Plaintiffs-Appellants’ complaint, the use of this term implicitly communicates
a mixed present/future statement of the sort analyzed by the Seventh Circuit
in Makor Issues, 513 F.3d at 705. With respect to the relative “confidence in
the commercial productibility of the reservoir,” the use of the industry-specific



   25  In re Stone & Webster, Inc., Sec. Litig., 414 F.3d 187, 213 (1st Cir. 2005) (“The mere fact
that a statement contains some reference to a projection of future events cannot sensibly
bring the statement within the safe harbor if the allegation of falsehood relates to non-
forward-looking aspects of the statement.”).
    26 Institutional Investors Grp. v. Avaya, Inc., 564 F.3d 242, 255 (3d Cir. 2009).
    27 Makor Issues, 513 F.3d at 705.

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                                        No. 13-20519
term, “reserve,” may be characterized as forward-looking.                        The use of
standardized modifiers under the PRMS, including “proved,” “probable,” and
even “possible,” also communicate predictions about the future likelihood of
commercial productibility.            In that sense, the November 2009 slide
presentation’s use of the apparently non-standardized modifiers, “estimated”
and “recoverable,” in the phrase, “estimated recoverable reserves,” likely also
communicated a forward-looking statement regarding the commercial
productibility of the CPO 4 Block. To the extent that Defendants-Appellees
have emphasized this aspect of the statement in the November 2009 slide
presentation, Defendants-Appellees are correct that the term communicated a
forward-looking statement.
         In this case, however, Plaintiffs-Appellants do not argue that they were
deceived regarding the CPO 4 Block’s commercial productibility or any other
aspect of the CPO 4 Block’s future performance. On the contrary, Plaintiffs-
Appellants allegations of fraud focus on that component of the term, “reserves,”
communicating information about the geological testing that had already
occurred with respect to the hydrocarbon reservoirs on the CPO 4 Block. The
factual issue of whether actual production or formation tests have already
taken place in the past is undoubtedly backward-looking. We therefore hold,
in accordance with Makor Issues, 513 F.3d at 705, and other similar decisions
by the First and Third Circuits, 28 that Defendants-Appellees’ use of the term,
“reserves,” is “not entitled to the safe harbor with respect to the part of the
statement that refers to the present.”
         Finally, Defendants-Appellees argue that even if the November 2009
statement regarding “estimated recoverable reserves of 1 to 4 billion barrels”
had been false based on Defendants-Appellees’ use of the term, “reserves,” then


   28   See Avaya, 564 F.3d at 255; Stone & Webster, 414 F.3d at 213.
                                              24
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                                       No. 13-20519
“the facts constituting the violation” would shortly thereafter have become
publicly known on March 29, 2010—triggering the two-year statute of
limitations under 28 U.S.C. § 1658(b)(1). According to Defendants-Appellees,
a statement in Defendants-Appellees’ Form 10-K, which was filed on March
29, 2010, explained that the oil-and-gas concession contained only 1.2 million
barrels of “net proved reserves.” This document, in Defendants-Appellees’
view, would have alerted investors to the falsity of the November 2009
statement regarding more than a “billion barrels.” If so, then the two-year
statute of limitations would have run before Plaintiffs-Appellants filed their
complaint on April 27, 2012.
        However, because “proved” reserves are only a subcategory of “reserves”
under the PRMS and SEC regulations, this argument is unpersuasive. As
indicated by the SEC’s release, both “probable reserves” and “possible reserves”
also fall into the broader category of “reserves,” and yet are not “proved
reserves.” 29 Such subcategories of hydrocarbon reservoirs therefore could have
been encompassed by the erroneous statement in the November 2009 slide
presentation, but would have fallen outside the purported corrective statement
regarding “net proved reserves” in Defendants-Appellees’ Form 10-K in March
2010. Reading both documents together, an investor could form the opinion
that “estimated recoverable reserves of 1 to 4 billion barrels” had been
confirmed by geological testing on the CPO 4 Block, although only 1.2 million
barrels of this amount had yet demonstrated sufficient commercial
productibility to constitute “net proved reserves.” Accordingly, Defendants-
Appellees’ March 2010 disclosure would not have demonstrated the falsity of


   29 See Modernization of Oil and Gas Reporting, 74 Fed. Reg. at 2160, 2167 (“‘[P]robable
reserves’ are those additional reserves that are less certain to be recovered than proved
reserves but which, in sum with proved reserves, are as likely as not to be recovered. . . .
[P]ossible reserves include those additional reserves that are less certain to be recovered than
probable reserves.”).
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                                  No. 13-20519
the statement in November 2009. The Form 10-K therefore would not have
triggered the two-year statute of limitations under 28 U.S.C. § 1658(b)(1).
      Similarly, Defendants-Appellees argue based on Merck & Co., Inc. v.
Reynolds, 559 U.S. 633, 653 (2010), that a reasonably diligent plaintiff would
have begun to investigate the falsity of Defendants-Appellees’ November 2009
statements when the Seeking Alpha and Sharesleuth articles were published
in 2010. Because more than two years passed between those articles and
Plaintiffs-Appellants’ filing of their amended complaint in November 2012 to
include a claim based on the November 2009 statement, Defendants-Appellees
argue that the claim based on the November 2009 statement should be
dismissed under the statute of limitations.
      The district court was correct to conclude, however, that this argument
could not be evaluated on a motion to dismiss under the circumstances of this
case. In Merck, 559 U.S. at 653, the Supreme Court concluded that “the
limitations period in § 1658(b)(1) begins to run once the plaintiff did discover
or a reasonably diligent plaintiff would have ‘discover[ed] the facts constituting
the violation’—whichever comes first.” Although the critical facts regarding
this limitations argument may be discovered during later stages of this
litigation, the face of Plaintiffs-Appellants’ complaint does not present facts
that would satisfy either of the Supreme Court’s two tests. It is not clear from
the complaint when Plaintiffs-Appellants actually discovered the facts
surrounding Defendants-Appellees’ allegedly false statement in November
2009, nor is it clear when a reasonably diligent plaintiff would have discovered
such facts. We therefore agree with the district court that the limitations issue
cannot be decided at this early stage of the proceedings.
                                      VII.
      For these reasons, we conclude that Plaintiffs-Appellants have
sufficiently pled their claims for securities fraud in accordance with 15 U.S.C.
                                       26
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                               No. 13-20519
§ 78u-4 and § 78u-5. Accordingly, we need not consider the parties’ arguments
as to whether the district court abused its discretion by denying Plaintiffs-
Appellants’ request to amend their complaint. We therefore REVERSE and
REMAND this case for further proceedings in accordance with this opinion.
     REVERSED and REMANDED.




                                     27
