Case 1:13-cv-04790-CM Document 1 Filed 07/10/13 Page 1 of 31 i LAY 90 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
DAVID LUCIANO, Individually and on Civil Action No.: Behalf of All Other Persons Similarly Situated, Plaintiff, JURY TRIAL DEMANDED
V.
L1NNCO, LLC, MARK E. ELLIS, KOLJA ROCKOV, DAVID B. ROTTINO, GEORGE A. ALCORN, DAVID D. DUNLAP, TERRENCE S. JACOBS, MICHAEL C. L1NN, JOSEPH P. MCCOY, JEFFREY C. SWOVELAND, BARCLAYS CAPITAL INC., CITIGROUP GLOBAL MARKETS INC., RBC CAPITAL MARKETS, LLC, WELLS FARGO SECURITIES, LLC, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, CREDIT SUISSE SECURITIES (USA) LLC, RAYMOND JAMES & ASSOCIATES, INC., UBS SECURITIES LLC, GOLDMAN, SACHS & CO., J.P. MORGAN SECURITIES LLC, ROBERT W. BAIRD & CO., INCORPORATED, BMO CAPITAL MARKETS CORP., CREDIT AGRICOLE SECURITIES (USA) INC., CIBC WORLD MARKETS CORP., HOWARD WElL INCORPORATED, AND MITSUBISHI UFJ SECURITIES (USA), INC., Defendants.
CLASS ACTION COMPLAINT
Plaintiff David Luciano ("Plaintiff'), individually and on behalf of all other persons similarly situated, by his undersigned attorneys, for his complaint against defendants, alleges the following based upon personal knowledge as to himself and his own acts, and upon information Case 1:13-cv-04790-CM Document 1 Filed 07/10/13 Page 2 of 31
and belief as to all other matters, based upon, inter alia, the investigation conducted by and through his attorneys, which included, among other things, review and analysis of (a) regulatory
filings made by LinnCo, LLC ("LNCO" or the "Company"), with the United States Securities
and Exchange Commission ("SEC"); (b) press releases and other public statements published
and disseminated by LNCO; (c) transcripts of earnings calls conducted by officers of LNCO
after the announcement of quarterly earnings; (d) media reports about LNCO and its
management; and (e) review of other publicly available information concerning LNCO and its
management. Plaintiff believes that substantial evidentiary support will exist for the allegations
set forth herein after a reasonable opportunity for discovery.
NATURE OF THE ACTION
1. This is a federal securities class action on behalf of a class consisting of all
persons other than defendants who purchased or otherwise acquired LNCO shares pursuant or
traceable to LNCO's false and misleading Registration Statement and Prospectus (collectively,
the "Offering Documents") through July 1, 2013, inclusive (the "Class Period"), seeking to
recover damages caused by defendants' violations of the federal securities laws and to pursue
remedies under §§ 11 and 15 of the Securities Act of 1933 ("1933 Act").
2. LNCO is a Delaware limited liability company whose sole purpose is to own units
representing limited liability company interests ("units") in Linn Energy, LLC ("Linn"). Linn is
an independent natural gas exploration and production company whose units trade on NASDAQ
under the symbol "LINE."
3. On October 12, 2012, LNCO filed its Prospectus for its initial public offering
("IPO"), which forms part of the Registration Statement that became effective on October 11,
2012. Pursuant to the IPO, 34,787,500 shares of LNCO were sold at a price of $36.50 per share, Case 1:13-cv-04790-CM Document 1 Filed 07/10/13 Page 3 of 31
raising approximately $1.2 billion in net proceeds for the Company after underwriting discounts, commissions, and fees. LNCO used the net proceeds from the IPO to acquire units in Linn equal to the number of shares sold in the IPO.
4. As set forth in the Prospectus, LNCO has no significant operations or assets other than its ownership of units in Linn, and its cash flow consists exclusively of distributions from
Linn. Accordingly, LNCO's ability to pay dividends to its shareholders is entirely dependent upon the ability of Linn to make distributions to its unitholders.
5. On February 20, 2013, Linn and LNCO announced an agreement to merge with
Berry Petroleum Company ("Berry") by issuing LNCO shares to Berry shareholders. Under the terms of the deal, Linn would then acquire the operating assets of Berry from LNCO in exchange for additional units of Linn.
6. In two articles published in February 2013 (just prior to the announcement of the transaction with Berry) and in May 2013, Barron's questioned Linn's aggressive accounting practices. Among other things, Barron 'S criticized Linn for using nonGAAP accounting to mask considerable weakness in its distributable cash flows, thus calling into question the sustainability of its dividend. Further, Barron 's questioned Linn's accounting for its derivative contracts by, for example, excluding the cost of its puts from its cash flow, while including the gains. As a result of these issues, in its May 2013 article, Barron 's labeled Linn "the country's most overpriced large energy producer."
7. Following the May 2013 Barron 's article, Linn units declined 7%, to close at
$35.75 per unit on May 6, 2013. In turn, LNCO shares dropped nearly 8% to close at $39.24 per share on May 6, 2013.
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8. On July 1, 2013, Linn and LNCO disclosed that the SEC had opened an informal inquiry into LNCO's proposed merger with Berry, and Linn and LNCO's hedging strategies and use of non-GAAP financial measures (the same accounting issues for which Linn and LNCO had been criticized by Barron 's).
9. On this news, LNCO shares dropped $10.12 per share, or 27.3%, within two trading sessions, to close at $26.95 per share on July 3, 2013.
10. As further detailed below, the Defendants made false and/or misleading statements, as well as failed to disclose material adverse facts about LNCO's business and financial condition. Specifically, Defendants made false and/or misleading statements and/or failed to disclose to LNCO investors that Linn was overstating the cash flow available for distribution to Linn unitholders such as LNCO by, among other things, excluding the cost of certain hedging transactions from its calculation of Adjusted EBITDA, a metric highlighted as important in the Prospectus.
JURISDICTION AND VENUE
11. The claims asserted herein arise under and pursuant to §§ 11 and 15 of the 1933
Act [15 U.S.C. §77k and 77o].
12. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. § 1331, § 22 of the 1933 Act.
13. Venue is proper in this District pursuant to 28 U.S.C. § 1391(b) because many of the acts and omissions complained of herein occurred in substantial part in this District. Many of the Underwriter Defendants maintain their headquarters and/or other office in this District. All of the defendants conducted business in this District related to the IPO, and otherwise, and Case 1:13-cv-04790-CM Document 1 Filed 07/10/13 Page 5 of 31
LNCO trades on the NASDAQ exchange which is headquartered in this District at One Liberty
Plaza, 165 Broadway, New York, NY 10006.
14. In connection with the acts, conduct and other wrongs alleged in this Complaint,
defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,
including but not limited to, the United States mail, interstate telephone communications and the
facilities of a national securities exchange.
PARTIES
15. Plaintiff David Luciano, as set forth in the attached certification, purchased
LNCO shares in or traceable to the Offering Documents and suffered economic damages when the price of LNCO shares declined.
16. Defendant LNCO is a Delaware limited liability company formed on April 30,
2012, under the Delaware Limited Liability Company Act. Its principal executive offices are
located at 600 Travis, Suite 5100, Houston, TX 77002. LNCO's shares trade on the NASDAQ
Global Select Market ("NASDAQ") under the ticker symbol "LNCO."
17. Defendant Mark E. Ellis ("Ellis") is, and was at all relevant times, the Chairman,
President, and Chief Executive Officer of LNCO. Ellis signed the false and misleading
Registration Statement.
18. Defendant Koija Rockov ("Rockov") is, and was at all relevant times, the Chief
Financial Officer and Executive Vice President of LNCO. Rockov signed the false and
misleading Registration Statement.
19. Defendant David B. Rottino ("Rottino") is, and was at all relevant times, the
Chief Accounting Officer and Senior Vice President at LNCO. Rottino signed the false and
misleading Registration Statement.
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20. The defendants named in ¶IJ 17-19 above are sometimes referred to herein as the
"Officer Defendants."
21. Defendant George A. Alcorn ("Alcorn") serves as a director of LNCO. Alcorn signed or authorized the signing of the false and misleading Registration Statement.
22. Defendant David D. Dunlap ("Dunlap") served as a director of LNCO from at least August 2, 2012 to February 19, 2013 (when Dunlap resigned as a director of LNCO in connection with the proposed transaction with Berry). Dunlap signed or authorized the signing of the false and misleading Registration Statement.
23. Defendant Terrence S. Jacobs ("Jacobs") serves as a director of LNCO. Jacobs signed or authorized the signing of the false and misleading Registration Statement.
24. Defendant Michael C. Linn ("Mr. Linn") serves as a director of LNCO. Mr. Linn signed or authorized the signing of the false and misleading Registration Statement.
25. Defendant Joseph P. McCoy ("McCoy") serves as a director of LNCO. McCoy signed or authorized the signing of the false and misleading Registration Statement.
26. Defendant Jeffrey C. Swoveland ("Swoveland") served as a director of LNCO from at least August 2, 2012 until February 19, 2013 (when Swoveland resigned as a director of
LNCO in connection with the proposed merger with Berry). Swoveland signed or authorized the signing of the false and misleading Registration Statement.
27. The defendants named in ¶J 21-26 above are sometimes referred to herein as the
"Director Defendants."
28. Defendant Barclays Capital Inc. ("BCI") is a global investment bank. BCI is headquartered in this District at 200 Park Avenue, New York, NY 10166. BCI was an underwriter for LNCO's IPO, helping to draft and disseminate the offering documents.
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29. Defendant Citigroup Global Markets Inc. ("CGMI") is the brokerage and securities arm of Citigroup, Inc., and provides investment banking services to corporate, institutional, government, and retail clients. CGMI is headquartered in this District at 388
Greenwich St., New York, NY 10013. CGMI was an underwriter for LNCO's IPO, helping to draft and disseminate the offering documents.
30. Defendant RBC Capital Markets, LLC ("RBC") is a global investment bank.
RBC is headquartered at Royal Bank Plaza200, Bay Street, Toronto, ON, M5J 2W7RBC, and conducts substantial business in this District out of offices located at One Liberty Plaza, 165
Broadway, New York, NY 10006-1404. RBC was an underwriter for LNCO's IPO, helping to draft and disseminate the offering documents.
31. Defendant Wells Fargo Securities, LLC ("WFS") is a provider of capital markets and investment banking services, and a division of Wells Fargo & Company. WFS is headquartered at 600 California Street, Suite 1600, San Francisco, CA 94108, and conducts substantial business in this District from offices located at 375 Park Avenue, New York, NY
10152. WFS was an underwriter for LNCO's IPO, helping to draft and disseminate the offering documents.
32. Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") is a registered broker-dealer and investment adviser and a wholly-owned subsidiary of Bank of
America Corporation. Merrill Lynch is headquartered in this District at 4 World Financial
Center, North Tower, New York, NY 10080. Merrill Lynch was an underwriter for LNCO's
IPO, helping to draft and disseminate the offering documents.
33. Defendant Credit Suisse Securities (USA) LLC ("CSS") provides investment banking services in the United States. CSS is headquartered in this District at Eleven Madison
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Avenue, New York, NY 10010. CSS was an underwriter for LNCO's IPO, helping to draft and disseminate the offering documents.
34. Defendant Raymond James & Associates, Inc. ("RJA") is a diversified financial services holding company engaged primarily in investment and financial planning, investment banking and asset management. RJA is headquartered at 880 Carillon Parkway, St. Petersburg,
FL 33716, and conducts substantial business in this District from offices located at 277 Park
Ave, Suite 410, New York, NY 10172. RJA was an underwriter for LNCO's IPO, helping to draft and disseminate the offering documents.
35. Defendant UBS Securities LLC ("UBS") is an investment banking and securities firm. UBS is headquartered at 2711 Centerville Road, Suite 400, Wilmington, DE 19808, and conducts significant business in this District from offices located at 1285 Avenue of the
Americas, New York, NY 10019. UBS was an underwriter for LNCO's IPO, helping to draft and disseminate the offering documents.
36. Defendant Goldman, Sachs & Co. ("Goldman") is a full-service global investment banking and securities firm. Goldman is headquartered in this District at 200 West Street, New
York, NY 10282. Goldman was an underwriter for LNCO's IPO, helping to draft and disseminate the offering documents.
37. Defendant J.P. Morgan Securities LLC ("JPM") is a leading financial services firm. JPM is headquartered in this District at 383 Madison Avenue, New York, NY 10179. JPM was an underwriter for LNCO's IPO, helping to draft and disseminate the offering documents.
38. Defendant Robert W. Baird & Co. Incorporated ("Baird") is a wealth management, capital markets, asset management and private equity firm. Baird is headquartered at 777 F Wisconsin Ave., Milwaukee, WI 53202, and conducts significant business in this
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District from offices located at 3 Rockefeller Plaza, 610 Fifth Avenue, New York, NY 10112.
Baird was an underwriter for LNCO's IPO, helping to draft and disseminate the offering documents.
39. Defendant BMO Capital Markets Corp. ("BMO") is a leading, full-service North
American financial services provider offering, among other services, equity and debt underwriting. BMO is headquartered at 100 King Street West, 1 First Canadian Place, Toronto,
ON M5X 1H3, and conducts significant business in this District from offices located at 3 Times
Square 429, New York, NY 10036. BMO was an underwriter for LNCO's IPO, helping to draft and disseminate the offering documents.
40. Defendant Credit Agricole Securities (USA) Inc. ("CAS") is a full service institutional broker/dealer. CAS is headquartered in this District at 1301 Avenue of the
Americas, New York, NY 10019. CAS acted was an underwriter for LNCO's IPO, helping to draft and disseminate the offering documents.
41. Defendant CIBC World Markets Corp. ("CIBC") is the investment banking subsidiary of the Canadian Imperial Bank of Commerce, and provides a variety of financial services, including investment banking advisory services. CIBC is headquartered in this District at 425 Lexington Avenue, New York, NY 10017. CIBC was an underwriter for LNCO's IPO, helping to draft and disseminate the offering documents.
42. Defendant Howard Weil Incorporated ("Howard Weil") is an energy investment boutique that provides investment banking services. Howard Weil is headquartered at 1100
Poydras Street, Suite 3500, New Orleans, LA 70163. Howard Weil acted as an underwriter for
LNCO's IPO, helping to draft and disseminate the offering documents. Case 1:13-cv-04790-CM Document 1 Filed 07/10/13 Page 10 of 31
43. Defendant Mitsubishi UFJ Securities (USA), Inc. ("Mitsubishi") provides investment banking and brokerage products and services to institutional clients, and is a member of the Mitsubishi UFJ Financial Group, Inc., a global Japan-based financial services company.
Mitsubishi is headquartered in this District at 1633 Broadway, 29th floor, New York, NY 10019-
6708. Mitsubishi was as an underwriter for LNCO's IPO, helping to draft and disseminate the offering documents.
44. According to the Offering Documents "Barclays Capital Inc., Citigroup Global
Markets Inc., RBC Capital Markets, LLC, Wells Fargo Securities, LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC, Raymond James &
Associates, Inc. and UBS Securities LLC are acting as representatives of the underwriters and as joint book-running managers of this offering."
45. The defendants named in TT 28-44 above are sometimes referred to herein as the
"Underwriter Defendants."
SUBSTANTIVE ALLEGATIONS
Background
46. As noted, the sole purpose of LNCO is to own units of Linn. As represented in the
Prospectus:
We are a recently formed Delaware limited liability company that has elected to be treated as a corporation for United States ("U.S.") federal income tax purposes. Our sole purpose is to own LININ units and we expect to have no assets or operations other than those related to our interest in LINN. As a result, our financial condition and results of operations will depend entirely upon the performance of L1NN. We will use the net proceeds from this offering to acquire a number of LINN units equal to the number of LinnCo shares sold in this offering. At the closing of this offering, we will own one LINN unit for each of our outstanding shares, and our limited liability company agreement requires that we
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maintain a one-to-one ratio between the number of our shares outstanding and the number of LINN units we own. When LINN makes distributions on the units, we will pay a dividend on our shares of the cash we receive in respect of our LINN units, net of reserves for income taxes payable by us. For each of the periods ending December 31, 2012, 2013, 2014 and 2015, we estimate that our income tax liability will be between 2% and 5% of the cash distributed to us. On July 24, 2012, LINN declared a regular quarterly cash distribution of $0.725 per unit, or $2.90 per unit on an annualized basis. Accordingly, if L1NN were to maintain its current annualized distribution of $2.90 per unit through 2015, the amount reserved to pay income taxes of LinnCo is estimated to be between $0.06 and $0.15 per share for each of the periods ending December 31, 2012, 2013, 2014 and 2015. For example, we currently estimate that, for the period ending December 31, 2013, our dividend will be $2.84 per share on an annualized basis.
47. Linn is one of the largest publicly-traded, U.S.-focused, independent oil and natural gas exploration companies, and is the largest publicly-traded upstream oil and natural gas company that is treated as a partnership for U.S. federal income tax purposes. Linn is focused on the development and acquisition of long-life oil and natural gas properties. Among its assets are oil and natural gas properties in the following operating regions: Mid-Continent, the Hugoton
Basin, the Green River Basin, the Permian Basin, Michigan/Illinois, California, the
Williston/Powder River Basin, and East Texas.
48. Because Linn is treated as a partnership for tax purposes, it created LNCO to enhance Linn's ability to raise additional equity capital to execute on its acquisition and growth strategy. Specifically, because LNCO is taxed as a corporation, it appeals to investors that would like to invest in a dividend-paying oil and natural gas exploration and production company such as Linn, but would not otherwise invest in Linn units due to various undesirable tax consequences and onerous tax reporting requirements that come with owning securities of an entity taxed as a partnership.
49. As of March 31, 2013, LNCO owned approximately 15% of Linn's outstanding units. Because LNCO's sole asset is Linn units, its success is entirely dependent upon the operation and management of Linn, and its ability to pay dividends to its shareholders is entirely 11 Case 1:13-cv-04790-CM Document 1 Filed 07/10/13 Page 12 of 31
dependent upon the ability of Linn to make distributions to its unitholders. Reflecting this reality, all of LNCO's quarterly and annual financial reports since the IPO have included the equivalent quarterly and annual financial reports of Linn as exhibit. Such exhibits were incorporated by reference into the respective LNCO report.
50. LNCO shareholders have the right to vote on any matter submitted by Linn to a vote of its unitholders (including the annual election of the Linn board of directors) insofar as
LNCO will vote the Linn units it holds in the same manner as its shareholders vote on those matters. However, LNCO shareholders do not have the right to elect the LNCO board of directors. Instead, Linn holds the sole voting share in LNCO with the right to elect the LNCO board of directors.
51. LNCO has no employees, and has an agreement with Linn to provide it will all of its necessary services and support. LNCO's senior executives are identical to those of Linn, and until recently (due to the pending merger with Berry), its directors were also identical to those of
Linn. LNCO's principal executive offices are at the same address as those of Linn.
Defendants' Materially False and Misleading Statements Made In Connection with the IPO and Issued During the Class Period
52. On or about October 2, 2012, LNCO and Linn filed with the SEC a final Form 5-
1/A Registration Statement, which would later be utilized for the IPO, and which incorporated a
Prospectus to be used in connection with the offer and sale of LNCO shares, and the deemed offer and sale of Linn units to be acquired by LNCO with the proceeds of its IPO. The
Registration Statement contained untrue statements of material facts or omitted to state other facts necessary to make the statements made not misleading, and was not prepared in accordance with the rules and regulations governing its preparation.
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53. The Offering Documents indicated that "[o]n April 24, 2012, [Linn's] Board of
Directors approved an increase in the quarterly cash distribution from $0.69 per unit to $0.725 per unit with respect to the first quarter of 2012, representing an increase of 5%," and that [o]n
July 24, 2012, [Linn's] Board of Directors declared a cash distribution of $0.725 per unit with respect to the second quarter of 2012." Annualized to $2.90 per unit, the yield on Linn's units as of the date of the IPO was over 7%. LNCO was thus positioned as a stock for investors seeking income, and value of its shares was tied primarily to the likelihood that Linn would continue to have the capacity to pay substantial and increasing distributions to its unitholders.
54. While LNCO reports net income like all other companies, the Offering
Documents steer investors towards another metric LNCO identifies as material to its business.
The Offering Documents represent that management utilizes "Adjusted EBITDA" as a financial metric to gauge Linn's ability to pay distributions, and that this metric is used as an important quantitative measure by similar companies. The Offering Documents represent as follows in this regard:
Adjusted EBITDA is a measure used by LINN's management to indicate (prior to the establishment of any reserves by the board of directors) the cash distributions L1NN expects to make to its unitholders. Adjusted EBITDA is also a quantitative measure used throughout the investment community with respect to publicly traded partnerships and limited liability companies.
55. The Offering Documents presented the following definition of Adjusted
EBITDA:
LINN defines adjusted EBITDA as net income (loss) plus the following adjustments:
Net operating cash flow from acquisitions and divestitures, effective date through closing date;
Interest expense;
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Depreciation, depletion and amortization;