In re Houston American Energy Corp. Securities Litigation (970 F. Supp. 2d 613, 2013)

OPINION AND ORDER

MELINDA HARMON, District Judge.

Pending before the Court in the above referenced, putative federal securities class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3), brought on behalf of persons other than Defendants who purchased Houston American Energy Corp. common stock between November 9, 2009 and April 18, 2012 (the putative “Class Period”), is Defendants Houston American Energy Corp. (“Houston American”), John F. Terwilliger, James J. Jacobs, John P. Boylan, Orrie Lee Tawes III, and Stephen Hartzell’s motion to dismiss (instrument #53; memorandum, # 54) the Amended Consolidated Class Action Complaint (“Amended Complaint”) of Lead Plaintiffs Paul Spitzberg and Stephen Gerber, pursuant to the Private Securities Litigation Reform Act of 1995 (“PSLRA”) and Federal Rules of Civil Procedure 9(b) and 12(b)(6). Plaintiffs seek to recover damages and pursue remedies under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j(b) and 78t(a) respectively, and Securities Exchange Commission (“SEC”) Rule 10b-5 (17 C.F.R. § 240.10b-5), promulgated thereunder, against Houston American and some of its officers and directors.

After carefully reviewing the Amended Complaint, the briefs, and the applicable law, although the adequacy of the pleading is a close question, for the reasons stated below the Court finds that Defendants’ motion to dismiss for failure to state a claim for which relief can be granted should be granted.

Standards of Review

Federal Rule of Civil Procedure 8(a)(2) provides, “A pleading that states a claim for relief must contain ... a short and plain statement of the claim showing that the pleader is entitled to relief.” When a district court reviews a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), it must construe the complaint in favor of the plaintiff and take all well-pleaded facts as true. Randall D. Wolcott, MD, PA v. Sebelius, 635 F.3d 757, 763 (5th Cir.2011), citing Gonzalez v. Kay, 577 F.3d 600, 603 (5th Cir.2009).

“While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ... a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.... ” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007) (citations omitted). “Factual allegations must be enough to raise a right to relief above the speculative level.” Id. at 1965, citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-236 (3d ed.2004) (“[T]he pleading must contain something more ... than ... a statement of facts that merely creates a suspicion [of] a legally cognizable right of action”). “Twombly jettisoned the minimum notice pleading requirement of Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 ... (1957) [“a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief’], and instead required that a complaint allege enough facts to state a claim that is plausible on its face.” St. Germain v. Howard, 556 F.3d 261, 263 n. 2 (5th Cir.2009), citing In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir.2007) (“To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead ‘enough facts to state a claim to relief that is plausible on its face.’ ”), citing Twombly, 127 S.Ct. at 1974). “ ‘A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’ ” Montoya v. FedEx Ground Package System, Inc., 614 F.3d 145, 148 (5th Cir.2010), quoting Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1940, 173 L.Ed.2d 868 (2009). The plausibility standard is not akin to a “probability requirement,” but asks for more than a “possibility that a defendant has acted unlawfully.” Twombly, 550 U.S. at 556, 127 S.Ct. 1955. Dismissal is appropriate when the plaintiff fails to allege “ ‘enough facts to state a claim to relief that is plausible on its face’ ” and therefore fails to “ ‘raise a right to relief above the speculative level.’ ” Montoya, 614 F.3d at 148, quoting Twombly, 550 U.S. at 555, 570, 127 S.Ct. 1955.

In Ashcroft v. Iqbal, 129 S.Ct. at 1940, the Supreme Court, observed “the tenet that “only a complaint that states a plausible claim for relief survives a motion to dismiss,” a determination involving “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” “[T]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements do not suffice” under Rule 12(b). Iqbal, 129 S.Ct. at 1949. The plaintiff must plead specific facts, not merely eonclusory allegations, to avoid dismissal. Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498 (5th Cir.2000). “Dismissal is proper if the complaint lacks an allegation regarding a required element necessary to obtain relief ....” Rios v. City of Del Rio, Texas, 444 F.3d 417, 421 (5th Cir.2006), cert. denied, 549 U.S. 825, 127 S.Ct. 181, 166 L.Ed.2d 43 (2006).

“Rule 12(b) is not a procedure for resolving contests about the facts or the merits of a case.” Gallentine v. Housing Authority of City of Port Arthur, Tex., 919 F.Supp.2d 787, 794 (E.D.Tex.2012), citing 5A Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure: Civil 2d § 1356, at 294 (1990).

As noted, on a Rule 12(b)(6) review, although generally the court may not look beyond the pleadings, the Court may examine the complaint, documents attached to the complaint, and documents attached to the motion to dismiss to which the complaint refers and which are central to the plaintiffs claim(s), as well as matters of public record. Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383, 387 (5th Cir.2010), citing Collins, 224 F.3d at 498-99; Cinel v. Connick, 15 F.3d 1338, 1341, 1343 n. 6 (5th Cir.1994). See also United States ex rel. Willard v. Humana Health Plan of Tex., Inc., 336 F.3d 375, 379 (5th Cir.2003) (“the court may consider ... matters of which judicial notice may be taken”). Taking judicial notice of public records directly relevant to the issue in dispute is proper on a Rule 12(b)(6) review and does not transform the motion into one for summary judgment. Funk v. Stryker Corp., 631 F.3d 777, 780 (5th Cir.2011). “A judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.” Fed.R.Evid. 201(b).

In addition to Rules 8(a) and 12(b)(6), fraud claims must also satisfy the heightened pleading standard set out in Federal Rule of Civil Procedure 9(b): “In allegations alleging fraud ..., a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” A dismissal for failure to plead with particularity as required by this rule is treated the same as a Rule 12(b)(6) dismissal for failure to state a claim. Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1017 (5th Cir.1996). The Fifth Circuit interprets Rule 9(b) to require “specificity as to the statements (or omissions) considered to be fraudulent, the speaker, when and why the statements were made, and an explanation of why they were fraudulent.” Plotkin v. IP Axess, Inc., 407 F.3d 690, 696 (5th Cir.2005). See also Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 362 (5th Cir.2004) (“To satisfy Rule 9(b)’s pleading requirements the plaintiffs mustjspecify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.’”) (quoting Williams v. WMX Technologies, Inc., 112 F.3d 175, 177-78 (5th Cir.1997), cert. denied, 522 U.S. 966, 118 S.Ct. 412, 139 L.Ed.2d 315 (1997)).

“When a corporation is alleged to have made false representations, the court must [identify and] look to ‘the state of mind of the corporate official or officials who make or issue the statement.’ It follows that ‘[a] corporation can be held to have a particular state of mind [e.g., fraudulent intent] when that state of mind is possessed by a single individual.’ ” 7-Eleven Inc. v. Puerto Rico-7 Inc., Civ. A. No. 3:08-CV-00140-B, 2008 WL 4951502, *2 (N.D.Tex. Nov. 19, 2008), quoting Southland Sec. Corp., 365 F.3d 353, 366-67 (5th Cir.2004).

Private litigants who bring securities fraud claims must also satisfy the pleading requirements of the PSLRA before any discovery is allowed. “To state a securities fraud claim under section 10(b) and Rule 10b-5, plaintiff must plead (1) a misstatement or omission, (2) of a material fact, (3) made with scienter, (4) on which the plaintiffs relied, and (5) that proximately caused the plaintiffs injuries.” Southland, 365 F.3d at 362. For a misrepresentation to be material, “there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”. Basic Inc. v. Levinson, 485 U.S. 224, 231-31, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). “The appropriate inquiry is whether, under all the circumstances, the omitted fact or prediction without a reasonable basis ‘is one [that] a reasonable investor would consider significant in [making] the decision to invest, such that it alters the total mix of information available about the proposed investment.’” Rubinstein v. Collins, 20 F.3d 160, 168 (5th Cir.1994), quoting Krim v. BancTexas Group, 989 F.2d 1435, 1445 (5th Cir.1993).

For false statements of a material fact or a misleading omission of material fact, Plaintiffs must “specify each statement alleged to have been misleading and the reasons why the statement is misleading, and if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(2). See also ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336, 351 (5th Cir.2002) (“To summarize, a plaintiff pleading a false or misleading statement or omission as the basis for a section 10(b) and Rule 10b-5 securities fraud clam must, to avoid dismissal pursuant to Rule 9(b) and 15 U.S.C. §§ 78u-4(b)(1) and 78u-4(b)(3)(A): (1) specify each statement alleged to have been misleading, ie., contended to be fraudulent; (2) identify the speaker; (3) state when and where the statement was made; (4) plead with particularity the contents of the false representations; (5) plead with particularity what the person making the misrepresentation obtained thereby; and (6) explain the reason or reasons why the statement is misleading, ie., why the statement is fraudulent. Additionally, under 15 U.S.C. § 78u-4(b)(l), for allegations made on information and belief, the plaintiff must: (7) state with particularity all facts on which that belief is formed, i.e., set forth a factual basis for such belief.”).

Plaintiffs must also “state with particularity facts giving rise to a strong inference that defendants acted with the required state of mind,” scienter, i.e., “not merely simple or even inexcusable negligence,” but instead a mental state embracing “intent to deceive, manipulate, or ‘defraud,’ or that ‘severe recklessness’ in which the danger of misleading buyers or sellers ... is either known to the defendant or is so obvious that the defendant must have been aware of it.’ ” 15 U.S.C. § 78u-4(b)(2); Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir.2004), quoting Broad v. Rockwell Int’l Corp., 642 F.2d 929, 961-62 (5th Cir.1981) (en banc). To determine whether a plaintiff has adequately pleaded scienter under the PSLRA, all facts must be evaluated collectively, not in isolation, and the “court must take into account plausible inferences opposing as well as supporting a strong inference of scienter.” Ind. Elec. Workers’ Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527, 533 (5th Cir.2008), citing Tellabs, Inc. v.. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). “[T]he inference that the defendant acted with scienter need not be irrefutable, i.e., of the smoking-gun genre, or even the most plausible of competing inferences .... Yet the inference of scienter must ultimately be ‘cogent and compelling,’ not merely ‘reasonable’ or ‘permissible’ ” that Defendants acted with intent to deceive, manipulate, or defraud or with sévere recklessness in making the challenged statements. Id., quoting id. at 323, 127 S.Ct. 2499. The Fifth Circuit has rejected the contention that allegations of motive and opportunity standing alone will satisfy the scienter requirement, but it has found that they may meaningfully enhance the strength of the inference of scienter. Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 208 (5th Cir.2009) (citing Ind. Elec., 537 F.3d at 533), cert. denied, 558 U.S. 873, 130 S.Ct. 199, 175 L.Ed.2d 125 (2009).

The Fifth Circuit has also rejected group pleading of scienter and requires the plaintiffs to plead facts showing “the state of mind of the individual corporate official or officials ‘who make or issue the statement (or order or approve it or its making or issuance, or who furnish information or language for inclusion therein, or the like) rather than generally to the collective knowledge of all the corporation’s officers and employees acquired in the course of their employment.’ ” Id., citing id. Where the corporate documents have no stated author or statements with the documents are not attributed to any individual, a corporate officer’s signature on the document is sufficient to charge the document to him. Southland, 365 F.3d at 365. “[T]he corporation itself may be treated as making press releases and public statements issued by authorized officers on its behalf, and statements made by its authorized officers to further the interests of the corporation.” Id.

Under the PSLRA a plaintiff must prove that the defendant’s act or omission alleged to have violated the Exchange Act caused the loss for which the plaintiff seeks to recover damages. 15 U.S.C. § 78u-4(b)(4). To establish loss causation an investor must plead facts showing a causal relationship between his damages and the defendant’s material misstatement or omission. The Supreme Court has held that the traditional elements of proximate causation and economic loss must be alleged to establish loss causation under § 10(b). Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 346-17, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). For loss causation the plaintiff may not simply allege that the price of security on the date of purchase was inflated because of the alleged misrepresentation. Id. at 342, 125 S.Ct. 1627 (“as a matter of pure logic, at the moment that a transaction takes place, the plaintiff [who has purchased securities at an inflated price] has suffered no loss; the inflated purchase payment is offset by ownership of a share that at that instant possesses equivalent value.” (emphasis in original)). Nor does a decline in stock price following a public announcement of bad news, by itself, demonstrate loss causation supporting a securities fraud claim. 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. “An investor must show that the misstatement or omission itself is the actual cause of his economic loss, as opposed to changed economic circumstances, changed investor expectations, new industry-specific facts, conditions, or other events.” Dura Pharms., 544 U.S. at 342, 125 S.Ct. 1627; see also Alaska Elec. Pension Fund v. Flowserve Corp., 572 F.3d 221 (5th Cir.2009) (“The loss must be caused because this truth ‘ma[de] its way into the marketplace,’ not as a result of ‘changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions’ or other factors independent of the fraud.”), citing Dura Pharms., 544 U.S. at 342-43, 125 S.Ct. 1627. The Fifth Circuit requires that a plaintiff must allege either (1) a “facially ‘plausible’ causal relationship between the fraudulent statements or omissions and plaintiffs economic loss, including allegations of material misrepresentation or omission, followed by the leaking out of relevant or related truth about the fraud that caused a significant part of the depreciations of the stock and plaintiffs loss” or (2) “enough facts to give rise to a reasonable hope or expectation that discovery will reveal evidence of the foregoing elements of loss causation.” Lormand, 565 F.3d at 258. “[L]oss causation may be pleaded on the theory that the truth gradually emerged through a series of partial disclosures and that an entire series of partial disclosures caused the stock price deflation.” Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 261 (5th Cir.2009). The Fifth Circuit has ruled that notice pleading under Rules 8(a) and 12(b)(6), not heightened pleading, is sufficient to plead loss causation.

Factual Allegations of the Amended

Consolidated Class Action Complaint (# 44)

Defendant Houston American’s business is the exploration for and production of oil and natural gas in the United States, specifically developing concessions in properties in the Gulf Coast Region, principally Texas and Louisiana, and in the South American country of Colombia. Defendant John F. Terwilliger (“Terwilliger”) has been its Chief Executive Officer, President, and Chairman of the Board of Directors since April 2001. Defendant Jay Jacobs (“Jacobs”) has been Houston American’s Chief Financial Officer since July 2006. Defendant John Boylan (“Boylan”) has acted as a financial consultant to the oil and gas industry since 2007, served in a number of executive capacities in the industry in both the exploration and production and in the oil services sectors. A licensed CPA, Boylan has advised Houston American about its industry, operations, and operating environment. Defendant O. Lee Tawes III (“Tawes”) has served as a director of Houston American since 2005; and Defendant Stephen Hartzell (“Hartzell”), since 2005.. Houston American has three employees: Defendant Terwilliger, Defendant Jacobs, and Senior Vice President of Exploration Kenneth A. Jeffers (“Jeffers”).

This suit focuses on Houston American’s lease of the first of three exploration and production blocks in Llanos Basin, Columbia: (1) the 345,452-acre CPO 4 block, in which are located the C7 and C9 formations in the Tamandúa # 1 well; (2) the La Cuerva block of about 48,000 acres; and (3) the LLA 62 block of about 40,000 acres.

The Consolidated Class Action Complaint represents that Houston American, which had a 37% interest in the CPO 4 block, engaged SK Innovation Co., which held a 50% interest in the CPO 4 block, and Gulf United Energy, which had a 13% interest, as partners for its exploration activities in the CPO 4 block. According to one of Plaintiffs’ five unnamed but briefly described “Confidential Witnesses,” the partners formed a management committee composed of the following individuals to lead the exploration, decide where to drill and the number of wells to drill, as well as how deep to drill: Terwilliger, Jacobs, Confidential Witness 3, Ernest B. Miller (Executive Vice President of Gulf United Energy), Jim Ford (Executive Vice President of Gulf United Energy), and Jeffers.

According to Confidential Witness 3, a technical committee of the following people met regularly in Houston to review the progress at the CPO 4 block and to discuss the next steps, communicating almost daily by phone and email: Terwilliger, Jacobs, Jeffers, Ford, Gulf United Executive Vice President of Exploration James Fluker (“Fluker”), Confidential Witness 3, and Confidential Witness 4.

Plaintiffs explain that the Guidelines for Application of the Petroleum Resources Management System (“PRMS”) is a joint effort of the Society of Petroleum Engineers, the American Association of Petroleum Geologists, the World Petroleum Council, and the Society of Petroleum Evaluation Engineers to provide definitions and guidelines “designed to provide a common reference for the international petroleum industry, including national reporting and regulatory disclosure agencies, and to support petroleum project and portfolio management requirements. They are intended to improve clarity in global communications regarding petroleum resources.” #44 at p. 12. PRMS defines “reserves” as

those quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions. Reserves must further satisfy four criteria: they must be (1) discovered, (2) recoverable, (3) commercial, and (4) remaining (as of the evaluation date) based on the development project(s) applied. Reserves are further categorized in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterized by development and production status.

# 44 at pp. 12-13. Under PRMS,

To be included in the Reserves class, there must be a high confidence in the commercial productibility of the reservoir as supported by actual production or formation tests. In certain cases, Reservoirs may be assigned on the basis of well logs and/or core analysis that indicate that the subject reservoir is hydrocarbon-bearing and is analogous to reservoirs in the same area that are producing or have demonstrated the ability to produce on formation tests.

Id. at p. 13. In contrast, “ ‘resources’ are a broader category that encompass all quantities of petroleum naturally occurring on or within the Earth’s crust, discovered and undiscovered (recoverable or unrecoverable), as well as quantities already produced. Resources also include all types of petroleum, whether considered ‘conventional’ or ‘unconventional.’ ” Id. The PRMS does not allow companies to aggregate estimates of “reserves” with those of “resources”:

Petroleum quantities classified as Reserves, Contingent Resources, or Prospective Resources should not be aggregated with each other without due consideration of the significant differences in the criteria associated with their classification. In particular, there may be a significant risk that accumulations containing Contingent Resources and/or Prospective Resources will not achieve commercial production.

# 44 at p. 13. Plaintiffs allege that Houston American falsely represented its recoverable oil reserves to investors and knowingly disregarded industry standards on recoverable oil reserves.

In September 2010, Houston American hired Confidential Witness 1, who reported to Terwilliger and Jeffers. Pursuant to Terwilliger’s instructions, the engineer did not evaluate available reserves in CPO 4, but performed only a paper document review of the resources of the Llanos basin and did not conduct any tests of his own in the field, but instead relied on existing seismic data, geological maps, and other records. The engineer reported that Terwilliger did not want the engineer to do a risk assessment of the Llanos basin resources. As a result, he performed a “limited scope examination” in accordances with the Society of Petroleum Engineers and produced a written report without a risk assessment even though he believed “there could be a lot of risks in drilling in an area like that.” In fact the engineer thought there were “numerous” risks in that basin. An article dated October 19, 2010, published on LaRepublica.com.co, reported that Confidential Witness 1 prepared a document stating that some of Houston American’s estimates of oil reserves were not supported by official data or available evidence. In short, Confidential Witness 1 evaluated only resources, not reserves, for the CPO 4 block and even stated “there were no reserves” for the CPO 4 block. He also stated that it was impossible to evaluate the oil reserves in the CPO 4 block because no drilling had begun and thus there was no history of oil production from which to evaluate its oil reserves. When specifically asked if Houston American had a legitimate reason to characterize its oil resources in the CPO 4 block as “oil reserves,” he answered that Houston American had “never reached the point where they could call the oil resources there ‘reserves.’ ”

Despite the fact that Houston American had no basis to estimate oil reserves at the time of, or prior to, Confidential Witness l’s evaluation in September 2009 because there was no oil production data, Plaintiffs allege that Houston American falsely stated in investor presentation materials filed with the SEC on November 9, 2009 on Form 8-K, signed by Jacobs, that CPO 4 block contained huge amounts of oil reserves, i.e., approximately 1^4 billion barrels.

The partnership’s management committee purportedly continually disagreed about how to proceed with drilling in the CPO 4 block. Plaintiffs’ Confidential Witness 3 joined Houston American in January 2011 when it was “at the stage prior to drilling wells.” Confidential Witness 3 reported that he had disagreements with Houston American and that the partners also disagreed about where to drill the wells and about economic justification for drilling them, with SK less optimistic than Houston American about the prudence of doing so based on Confidential Witness 3’s review of the seismic data, which Confidential Witness 3 explained significantly lowered SK’s expectations for the CPO 4 block. SK wanted to drill only two wells, but Houston American and Terwilliger insisted on three, according to Confidential Witness 3. The management committee finally agreed to three wells in CPO 4 block despite the conflict among members. It chose to drill Tamandúa first, a second well, initially called Negretos, in the southeast, and a third on the eastern side.

Plaintiffs claim that Defendants knowingly failed to conduct the necessary tests for reporting recoverable oil reserves in CPO 4, for which drilling had to have been commenced — in actuality drilling in CPO 4 did not begin until mid 2011. Instead Defendants only conducted tests to determine “resources,” and Defendants knew that they did not have the requisite information and data to report “reserves.”

Drilling began on the Tamandúa # 1 well in July 2011, but problems quickly mounted. The well bit got stuck repeatedly and, according to Confidential Witness 3, the engineers were unable to determine why, so finally the management committee unanimously chose to sidetrack the well twice even though sidetracking increased the cost.

During this time Defendants issued statements that mainly attributed the delays to the “inflow of hydrocarbons” and claimed that “a significant amount of geological risk has been reduced.” They also issued positive statements that they found “a very significant show of hydrocarbons with some oils” and characterized these shows as “very, very positive.” Confidential Witnesses 3 and 4 stated that Houston American never found a “significant” or strong show of hydrocarbons.” They reviewed the geological tests and records and did not find any evidence of hydrocarbon shows at any time. Based on his review, Confidential Witness 4 stated that Houston American had never made any findings of “strong shows of hydrocarbons” or significant hydrocarbons,” and that “[t]here was no indication of gas or oil,” while Confidential Witness 3 corroborated that statement, observed that any hydrocarbons found “were not strong” and explained that it was not “factual” to represent that the well had “oil.”

As the drilling continued, the cost went $30 to $50 million over budget and took seven months instead of two. When the drilling reached 16,000 feet in December 2011, it hit rock and there was still no sign of oil. At that point, according to Confidential Witness 3, the committee decided to end the drilling effort because “it was obvious that we had to stop. It was decided in a telephone call. We couldn’t go any further.” The partners had SK Innovation Co. conduct a well test, which takes about three weeks, and it did not find flowable hydrocarbons in Tamandúa, reported Confidential Witness 3, who further observed, ‘We [SK] didn’t think the probability of finding hydrocarbons justified the cost.”

Houston American and Gulf United Energy decided to do another well test on a “sole risk basis,” i.e., do it themselves at their own expense, while SK decided not to participate because it did not think the probability of finding hydrocarbons justified the cost. That second round of tests of fluids at the bottom of the well in February or March 2012 found nothing, according to Confidential Witness 3. So they abandoned the first well and moved on to Negretos in the south, according to Confidential Witness 3.

Confidential Witness 5 joined SK in January 2012, approximately the time when SK Exploration was preparing to test the Tamandúa well for hydrocarbons and reported on it. He stated that the results of the C9 formation tests conducted by the partners around February 2012 were very disappointing and “there was nothing commercial there.... There was no continuous flow.” # 44 at p. 17.

Confidential Witness 4 also started working for SK in January 2012. When the team' drilled a six-inch hole and planned to do two tests, a C9 formation and a C7 formation, he confirmed that the results of the former were so disappointing that SK decided not to proceed further. Confidential Witness 4 further stated that “[t]he results were very, very poor.”

The technical committee reviewed the results of the drilling operation on the CPO 4 block. Confidential Witness 4 reviewed the geological tests and records and did not find evidence of strong hydrocarbon shows at any time. He reported that Houston American and Gulf United spent approximately $5 million on the second round of tests of the C7 formation, which took more than two weeks, only to be disappointed again. The committee then decided to abandon the well.

Plaintiffs then specifically detail the alleged materially misleading or false representations made by Houston American during the Class Period about the amount of recoverable oil reserves in the CPO 4 block, specifically in the C7 and C9 formations in the Tamandúa # 1 well, when there were no grounds for reporting recoverable oil reserves there. As the Amended Complaint’s newly added claim, they assert that on November 9, 2009 Houston American filed a Form 8-K with the SEC signed by Jacobs. It included slides prepared by Houston American for an investor presentation held that day regarding Houston American’s oil exploration prospects. Inter alia, it made the materially false or misleading statement in dispute: “CPO 4 Block consists of 345,452 net acres and contains over 100 identified leads or prospects with estimated reserves of 1 to 4 billion barrels.” Plaintiffs allege thát Confidential Witness 1 stated, “There were no reserves.” Thus Defendants had no basis for claiming in the Form 8-K filed on November 9, 2009 that the CPO 4 block contained “100 identified leads or prospects with estimated recoverable reserves of 1 to 4 billion barrels.” Moreover they never retracted or qualified the estimate. Houston American’s stock, in response, increased over 10%, rising from $3.95 to $4.35 on November 10, 2009 and reaching $4.83 by November 16, 2009, a 22% increase.

In-April 2010 financial publications began questioning Houston American’s disclosures. On April 7, 2010 an internet publication called “Seeking Alpha” posted an article entitled “Houston American Energy Corp. Set for Collapse” on its website questioning the value of Houston American stock and its “over-hyping” of the CPO 4 block, from which the complaint (# 44 at pp. 19-23) quotes extensively and which the Court incorporates, herein. Plaintiffs claim that the article caused the value of the stock to drop $5.84 per share on a very heavy trading volume to close at $14.51 on April 7, 2010. Houston American responded with a press release denying the allegations. Then on June 25, 2010, it announced that Defendant Broun had resigned for “personal and health reasons.” ■

On June 28, 2010, a website called Sharesleuth.com posted an article entitled, “Small Texas Company promotes big South American oil venture,” which the Court incorporates herein (# 44 at pp. 24-25) and which strongly criticized, indeed maligned, Houston American’s management and also doubted the value of the CPO 4 block, as well as the truthfulness of Defendants’ estimate of 1 to 4 billion barrels of recoverable reserves. It highlighted the fact that SK Energy said little about the CPO 4’s potential and did not list the tract among its main exploration and development projects for 2010. Houston American stock then fell $1.66 per share to close at $10.88 per share on June 28, 2010, and on the next day at $9.95. Plaintiffs assert that Houston American denied the accusations and continued making false statements throughout the Class Period.

In a press release on August 16, 2010, Terwilliger stated, “With our higher interest in CPO 4 and other recent prospects acquired in Colombia, we continue to focus on growing our reserves and production as our newer prospects are drilled over the next year.” On November 15, 2010 Houston American issued another press release reporting its financial results for the quarter and for the nine months ending September 30, 2010, in which Terwilliger stated,

Houston American Energy enjoyed another strong quarter, highlighted by our continuing success in Colombia where we have participated in drilling seven successful wells, year to date, out of eight wells drilled. Our oil production for the 2010 third quarter increased by 69% from the 2009 third quarter and for the nine months ended September 30, 2010 our oil production was up 224% from the same period in 2009. We have also benefited from a more favorable price environment for oil with average sales price of oil realized increasing 34% for the quarter and 35% for the nine month period. As a result, our revenues were up 122% for the quarter and 332% for the nine month period.

We continue to focus on identifying early stage resource plays where we can' participate in large resource potential at lower cost, typified by our Colombian operations. Our belief in the resource potential in Colombia, and in particular our Serranía and CPO 4 prospects, continues to grow. Our belief in that potential has translated into our hiring of an in-house Senior VP of Exploration to focus on development of our Colombian holdings and the decision during the third quarter to increase our stake in the CPO 4 prospect from 25% to 37.5%. We continue to invest in Serranía and CPO 4 and expect drilling of our • first wells on Serranía to occur in the near future with drilling on CPO 4 expected to commence in early 2011.

.... Together with our cash on hand, proceeds from our sale of Hupecol assets and sale of our Karnes County, Texas working interest leave us well positioned to fund all of our foreseeable development costs on Serranía and CPO 4.... Through this approach, we have steadily increased our stakes, and potential reserve finds, in resource plays in Colombia with our interests in Serranía and CPO 4 being' 12.5% and 37.5%, respectively, compared to our initial interests in Colombian assets that ranged from 1.6% to 12.5%.

Around December 1, 2010, Terwilliger, representing Houston American in a web-cast, stated that CPO 4 and Serranía “create an opportunity of absolutely extraordinary growth.”

Defendants argue that as of the dates of each of these materially false or misleading statements, no oil had been discovered in the CPO 4 block.

The SEC began investigating Houston American’s potential violations of federal securities laws regarding its purported reserves in October 2010, and the investigation progressed to a formal SEC investigation as of March 1, 2011. On March 15, 2011 Houston American filed its annual report for the period ending December 31, 2010 on a Form 10-K, which was signed by Terwilliger, Jacobs, Tawes, Hartzell, and Boylan. Defendants assert that it falsely stated, “We may from time to time be a party to lawsuits incidental to our business. As of March 1, 2011 we are not aware of any current, pending or threatened litigation or proceedings that could have a material adverse effect on our results of operations, cash flows or financial condition.” Houston American’s materially misleading statements, made when Defendants knew' they were subject to an SEC investigation concerning the core business of Houston American, -allegedly inflated the price of its stock from its closing price of $3.95 at the beginning of the Class Period on November 9, 2009 to a high of $20.44 on July 6, 2011.

In July 2011, Houston American’s Management Committee commenced drilling operations on the first test well prospect in CPO 4. On October 5, 2011 Houston American filed a Form 8-K signed by Jacobs, which reported problems when the “well encountered a significant kick from the uppermost pays sand” and the “strong inflow of hydrocarbons forced the well to be shut-in and stabilized.” It appeared to compromise the mud system, so it was decided to sidetrack the well and make changes to the well program that would modify the way in which the well would be drilled. The Form 8-K also stated,

While the Tamandúa # 1 is taking longer to drill than anticipated, we believe that a significant amount of geological risk has been reduced in the well and we are very encouraged from the strong shows of hydrocarbons (gas and oil) in the first objective sand, the C-7. In addition, production from fields around this area in the Llanos Basin is generally associated with stacked pay sequences so we are encouraged about the prospects of our lower sands due to the first objective sand (the C-7) bearing hydrocarbons. However, despite the information derived from the initial Tamandúa # 1 wellbore, there is no assurance that we will locate hydrocarbons in sufficient quantities to be commercially viable.

On October 6, 2011 Houston American filed another Form 8-K, signed by Jacobs, that contained investor presentation materials and that stated basically the same information.

The complaint alleges that on October 13, 2011, representing Houston American, Terwilliger participated in a Canncord Genuity Global Energy Conference and misleadingly stated regarding the progress of the CPO 4 drilling operations,

But the C7, which is the uppermost potential pay sand in the [Carbonara] series. We had tremendous kick which we announced and a very significant show of hydrocarbons gas with some oil. And that’s very interesting because it’s — geographically you always want your uppermost sand to have hydrocarbons in it. That suggests that for migration you know that you have a good change now if you have structures below you that there was migration through those structure. That’s very, very positive.

On November 8, 2011, Houston American filed a Form 10-Q report, signed by Terwilliger and Jacobs, for the period ending on September 30, 2011 and reported most of the same information, including the materially false statement that “the strong shows of hydrocarbons (gas and oil) in the first objective sand, are believed to increase the likelihood of hydrocarbons in the lower sands” and that “we believe the geological risk of the well has been reduced,” although “there is no assurance that we will locate hydrocarbons in sufficient quantities to be commercially viable.” Houston American’s Form-8K filed with the SEC on December 20, 2011 again stated that “[wjhile drilling the secondary objectives in the sidetrack, the C-7 and C-9 formations, we experienced strong hydrocarbon shows and an inflow of gas.” This statement led investors to believe that Defendants had encountered evidence consistent with the presence of actual oil in the well. As noted supra, several witnesses testified that the drilling never produced any evidence of “strong” or “significant” hydrocarbons nor any oil shows. Confidential Witness 3 stated that neither oil nor flowable hydrocarbons were found in the Tamandúa # 1 well, while Confidential Witness 4 represented that in his experience and review of reports and analyses of the CPO 4 block, Houston American had never made any findings of “strong shows of hydrocarbons”; in other words, they concluded there was no oil in the CPO 4 block in Tamandúa. Confidential Witness 4, the drilling manager of SK Exploration and Production, maintained that the well had not shown any significant amounts of hydrocarbons at any time.

Houston American stopped drilling in December 2011 when it hit rock and could not drill farther. It decided to and did conduct tests of the well in February and March. The first tests were “extremely discouraging” because they did not yield any evidence of flowable hydrocarbons or that the well was a commercial zone. Despite these findings, Defendants kept falsely representing that they had encountered oil shows or other indications of hydrocarbons. For example on March 1, 2012 Houston American presented an update in a press release in a Form 8-K signed by Terwilliger on the Tamandúa # 1 well, stating that it “exhibited oil shows while drilling, and other indications of hydrocarbons such as log analyses that indicate possible productive sands.”

' The partners completed hydrocarbon testing on Tamandúa # 1 well no later than March 2012. Confidential Witness 4 said the testing revealed that the C-9 formation had no oil and that therefore SK decided not to proceed with the testing it had planned in the adjoining C7 formation, but to move on to other projects. Houston American and Gulf United, however, went ahead with the second test, but, according to Confidential Witness 3, “did not find any flowable hydrocarbons in Tamandúa,” indeed found “nothing,” and SK therefore abandoned the well. Confidential Witness 5 also reported that “there was nothing commercially viable [in C9]” and “there was nothing we got to the surface to indicate it was a commercial zone. There was not continuous flow.”

Confidential Witness 2 represented that he had heard from his contacts in the industry about the issues that Houston American encountered in the CPO 4 block. He stated that Houston American waited about six to eight weeks after encountering these obstacles to publicly announce that it had stopped efforts to drill in the Tamandúa well. Confidential Witness 2 further stated that it “took forever” for Houston American to concede that the well could not be developed commercially.

Houston American’s 2011 Form 10-K annual report filed on March 7, 2012 for the period ending December 31, 2011, signed by Terwilliger, Jacobs, Tawes, Hartzell, and Boylan, continued to make false or misleading statements about the CPO 4 development and the strong presence of hydrocarbons. Inter alia it again stated that drilling on the first well on the CPO 4 block, the Tamandúa # 1, was “sidetracked to address drilling issues associated with high pressure and inflows of hydrocarbons into the well bore.” Moreover it reported,

While the well exhibited oil shows while drilling, and other indications of hydrocarbons such as log analysis that indicate possible productive sands, hole conditions have prohibited sufficient testing on the bottom hole. There have been many attempts to evaluate the well resulting in tool failures and stuck pipe, and current conditions are such that the operator has made the decision not to try to reenter the bottom hole sections. As a result of these developments, the decision has been made that without the ability to effectively test the lower zones, the most prudent course of action is to plug back the well and to further evaluate the C-7 and C-9 Formations. As indicated by the Logging While Drilling data, the well encountered approximately 200 feet of net resistive sands in the C-7 formation and approximately 140 feet of net resistive sands in the C-9 formation (resistive sands do not necessarily mean pay).

After attempting to complete the well, the rig is expected to be moved to one of two locations that are currently permitted and ready to receive the rig. In addition, the operator has five additional locations that are in various stages of permitting, location and construction.

We anticipate completion of the Tamandúa # 1 well during the first quarter of 2012 with well testing and, as appropriate, completion of the well to follow. Drilling of a second test well on the CPO 4 prospect is expected to commence shortly after completion of the Tamandúa # 1 well.

As noted, despite repeated representations that the drilling had produced strong carbon shows, according to Confidential Witness 3 the Tamandúa well had not exhibited any oil shows nor produced any significant amounts of hydrocarbons at any point, and the committee had stopped drilling in late 2011. Testing merely confirmed what Defendants already knew, i.e., that there was no oil in the well nor any significant evidence of hydrocarbons. Confidential Witness 4 stated, “I never got the impression from my review of geological tests and records that there were significant hydrocarbons discovered along the way.”

The 2011 Form 10-K also allegedly falsely stated, ‘We may from time to time be a party to lawsuits incidental to our business. As of March 1, 2012, we were not aware of any current, pending, or threatened litigation or proceedings that could have a material adverse effect on our results of operations, cash flows or financial condition.” This statement is false and misleading because Houston American admitted on April 19, 2012 that the SEC had issued a nonpublie formal order of private investigation on March 1, 2011, which followed a nonpublic informal inquiry begun by the SEC in October 2010. As part of the litigation in February and April of 2012 Houston American received three subpoenas issued by the SEC calling for testimony from the CEO and CFO and delivery of specified documents.

On March 1, 2012 Houston American also announced that drilling in the Tamandúa # 1 well was delayed and that further analysis of the well’s C7 and C9 formations would be announced as soon as available. Houston America stock then fell $3.84 per share, losing more than 35% of its value, to close at $7.00 per share on March 1, 2012.

In a press release on March 16, 2012 to update the status of the Tamandúa # 1 well in light of “various unfounded rumors,” Houston American stated,

Regarding the Tamandúa # 1 sidetrack well, the Company anticipates that it will be able to announce the test results of the C-9 and C-7 formations in a matter of days as soon as the information is available.

Regarding rumors currently circulating on message boards, John Terwilliger, Chairman and CEO of the Company, stated, “There is a great deal of speculation and misinformation currently posted on message boards regarding our company. Specifically, I would note that we believe that we have more than adequate cash on hand to fund our portion of anticipated costs of testing and completion of the Tamandúa # 1 sidetrack well and carrying on with our business plan. Further, statements that we are on the verge of bankruptcy are wholly unfounded. We have no debt on our books and have, what we believe to be, a valuable portfolio of prospects. We remain optimistic about our CPO 4 prospect and other prospects in our portfolio.”

In another press release on April 4, 2012, “an operational update on the Company’s CPO 4 block and status of the Tamandúa # 1 well,” Houston American announced,

The Company is currently eagerly awaiting the final results of the testing of the Tamandúa # 1 well and will announce the results as soon as they are available. During preliminary testing of the Tamandúa # 1 well it has been determined that the C-9 and C-7 formations experienced formation damage as a result of the mud program used to control the well while drilling. The formation damage has resulted in a testing period longer than what was originally anticipated. Although there have been delays with the testing, the Company remains optimistic that these conditions will be overcome and that it will be able to establish a successful test on the Tamandúa # 1 well.

After testing of the Tamandúa # 1 well is complete, the drilling rig on location will be moved to the next prospect on CPO 4. All necessary preparations have been completed for the drilling rig to move to the next prospect and begin drilling. These preparations included completion of the surface location and all logistics related to the drilling of the well, including all permitting. It should also be noted that the next prospect located on CPO 4 will be shallower than the Tamandúa # 1 well and is anticipated to be drilled in less than 60 days once the drilling rig is on location.

After the release, Houston American’s stock fell $0.11 to close at $4.67 on April 4, 2012. The stock price continued to fall, closing at $4.21 on April 5, 2012, $4.06 on April 9, 2012, and $3.67 on April 9, 2012, the next three trading days.

On April 19, 2012 Houston American in another press release announced termination of testing and completion efforts on the Tamandúa # 1 well “due to formation damage while drilling,” and plans for the next well on the CPO 4 block. It also disclosed that the SEC had been investigating it since October 2010 and had issued it three subpoenas calling for testimony from its chief executive officer and chief financial officer in addition to delivery of specified documents. In part the press release stated.

The Company is encouraged, however, by the information gained from [the Tamandúa # 1] well for other prospects on the block. The Tamandúa # 1 wellbore will be preserved in a way to allow for further evaluation, if at such time in the future it is determined that it is warranted.

The Company also announced that efforts are commencing to move the drilling rig from the Tamandúa # 1 well site to the location of the next prospect on the CPO 4 block. This next well is expected to spud in the May/June time frame. The Company expects that the data gained during the drilling, evaluation and testing of the Tamandúa # 1 well will be used to significantly help with future operations on the CPO 4 block.

The Company also confirmed that the Securities and Exchange Commission (“SEC”) is conducting a non-public formal investigation into the Company. The Company’s confirmation of such investigation follows receipt of information by the Company that third parties had become aware of the investigation.

Pursuant to the investigation, in February and April of 2012, the Company received three subpoenas issued by the SEC. The subpoenas called for the testimony of the Company’s chief executive officer and chief financial officer and the delivery of certain documents. The subpoenas were issued pursuant to a nonpublic formal order of a private investigation issued by the SEC on March 1, 2011, which followed a nonpublic informal inquiry commenced by the SEC in October 2010. The Company received a copy of the nonpublic formal order of private investigation on February 10, 2010 in connection with the February 2012 subpoenas issued by the SEC. Although the Company cannot be certain of the scope of the investigation, the SEC is trying to determine whether there have been any violations of federal securities laws. The investigation does not represent a conclusion by the staff that there have been any violations of the federal securities laws nor whether the staff would conclude that any enforcement action is appropriate. At this time the Company has not been made aware of a finding by the SEC of any securities violations. Also, as stated in the subpoenas issued by the SEC, the investigation does not mean that the SEC has a negative opinion of any person, entity, or security. The Company has cooperated fully, and is committed to continuing to cooperate fully, with the SEC in this matter. It is not possible at this time to predict the timing or outcome of the SEC investigation, including whether or when any proceedings might be initiated, when these matters may be resolved or what, if any, penalties or other remedies may be imposed, and whether any such penalties or remedies would have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

That same day the price of Houston American’s shares dropped $1.24, or more than 35.5% of its value, to close at $2.25 per share.

Since then the Company has admitted in its Form 10-Q, filed with the SEC for the period ending September 30, 2012, that the SEC investigation has targeted possible misrepresentations that the Company had made relating to the CPO-4 prospect, specifically “to matters relating to disclosures in the late 2009 and early 2010 time period regarding resource potential for the CPO-4 prospect.”

As a result of Houston American’s wrongful acts and omission and the precipitous drop in its stock value, Plaintiffs claim that class members have suffered significant losses and damages.

Plaintiffs assert two causes of action. The first is against Houston American, Terwilliger, and Jacobs for violations of Section 10(b) and Rule 10b-5 of the Exchange Act. The second is against the Individual Defendants for violations of Section 20(a) of the Exchange Act.

Defendants’ Motion to Dismiss (# 53)

Characterizing the Amended Complaint as impermissibly premised on fraud by hindsight, Defendants insist that Houston American continually warned that there is no way to predict prior to drilling and testing whether a well will be successful. In every press release about the Tamandúa # 1 well, Houston American expressly stated that “there is no assurance that we will locate hydrocarbons in sufficient quantities to be commercially viable.” It repeatedly warned that preliminary hydrocarbon shows did not mean the well would be a success.

Defendants contend that the Amended Complaint fails to satisfy the heightened pleading requirements of the PSLRA in the following ways. First, it fails to allege particularized facts showing that Houston American made false statements, but instead relies entirely on alleged statements by unnamed “Confidential Witnesses” to create the impression that Houston American knew in 2011 that the well would not be commercially viable. See Material Yard Workers Local 1175 Ben. Funds v. Men’s Wearhouse, Inc., No. H-09-3265, 2011 WL 3059229, at *6 (S.D.Tex. July 22, 2011) (Hughes, J.) (“A party who presents the stories of unnamed people is neither giving the court nor the defendant a plain statement of the facts____ A secret witness is not far above a false witness.”), citing Higginbotham v. Baxter Intern., Inc., 495 F.3d 758, 756-57 (7th Cir.2007) (“[W]e must discount allegations that the complaint attributes to five ‘confidential witnesses’ .... It is hard to see how information from anonymous sources could be deemed ‘compelling’ or how we could take account of plausible opposing inferences [as required by Tellabs]. Perhaps these confidential sources have axes to grind. Perhaps they are lying. Perhaps they don’t even exist.”). Furthermore Defendants argue that the allegations are “ambiguous as to timing and blur the lines between the witnesses’ knowledge of the post-testing state of play in 2012 and what Defendants knew in ‘real time’ during 2011,” despite the fact that the PSLRA requires particularized statements showing that the 2011 statements were false when made.

Second, Defendants contend that the Amended Complaint fails to plead particularized facts raising a strong inference of scienter. Although Plaintiffs assert that Defendants made false statements to inflate the value of Houston American’s stock, the only sales of such stock by Defendants occurred after the well failed and after Houston American’s share price declined. Moreover the Amended Complaint indicates that at its own risk, Houston American paid $5 million for a second test of the well, demonstrating that it did not know there was “no oil” in the well.

Third, Defendants complain that the Amended Complaint attempts, to- extend the class period back to challenge the reserve estimate in the November 2009 investor presentation. Defendants object that the claim is barred by (1) the PSLRA’s safe harbor for forward-looking statements and (2) the applicable two-year statute of limitations. They also charge that the allegations fail to satisfy the PSLRA’s heightened pleading standard.

Defendants emphasize that with each press release and disclosure, Houston American stated that there was no certainty that Houston American would locate commercially viable hydrocarbons in the Tamandúa well. They also advised potential investors to carefully review the filings with the SEC, quoting examples in whibh they identify many risk factors that affect their business plan.

. Plaintiffs claim that Houston American’s statements that the Tamandúa well encountered shows of hydrocarbons during drilling were false at the time they were made. Defendants respond that they were not false for several reasons. First, Houston American never stated that there was commercially viable oil or gas in the Tamandúa well and, citing examples, it repeatedly warned that regardless of any -hydrocarbons observed during drilling, it would not know the results until the well was tested and there might not be commercially viable hydrocarbons in the well. Second, they maintain that the market understood that Houston American’s statements were not promises or predictions; from the beginning, in its first disclosure on October 5, 2011, it disclosed that the “strong inflow of hydrocarbons forced the well to be shut-in and stabilized” and “compromised the mud system.” The drop in the value of its stock that day reflects that understanding of the serious problems encountered in the drilling. Third, significantly none of Plaintiffs’ Confidential Witnesses disputes that the well had to be “shut-in” due to a “strong inflow of hydrocarbons.” Confidential Witness 3 is the only witness who worked at SK in 2011 while the well was being drilled and thus the only one with personal knowledge of what was happening and what was known by Houston American at the time; he acknowledges that there were hydrocarbon shows during the drilling phase and questions only whether they were “strong.” There also is no allegation that he made this belief known to Houston American. Moreover the Amended Complaint states that Confidential Witness 3 “had many disagreements with Houston American” and “different opinions.” # 44 at ¶ 57. Disagreements among business executives, by themselves, do not support an inference of falsity. Confidential Witness 5 appears to concede that there were at least some hydrocarbons in the well in stating that there “was nothing commercially viable” and “no continuous flow.” Confidential Witness 4’s statement suggested the same: “I never got the impression from my review of the geological tests and records that there were significant hydrocarbons discovered along the way.” Houston American, moreover, had warned that “it is not easy to verify the quantity and quality of hydrocarbons in the formations due to the lack of porosity data” in the well.

Defendants also argue that since Plaintiffs are not able to provide particularized allegations that t