On June 11, 2018, the U.S. District Court for the Southern District of New York ("S.D.N.Y.") denied a Motion to Dismiss securities fraud claims brought by the SEC against two former executives ("Defendants") of energy company Penn West Petroleum Ltd. ("Penn West").

The SEC alleged that Defendants' behavior constituted fraud in violation of multiple securities laws, primarily under Exchange Act Section 10(b), 13(a), 13(b) and 17(a). Specifically, the SEC alleged that Defendants intentionally misrepresented Penn West's expenditures on mandatory disclosure documents, purposefully reclassifying operating expenses as capital expenditures without any legitimate basis.

Defendants filed a Motion to Dismiss arguing that the SEC's allegations failed to meet the heightened standards for fraud necessary under FRCP 9(b). The Court denied the Motion, explaining that the SEC's allegations adequately pleaded "facts that constitute circumstantial evidence of conscious misbehavior or recklessness" where a "reasonable person would deem the inference of scienter cogent" (citing Varghese v. China Shenghou Pharm. Holdings, Inc., 672 F. Supp. 2d 596, 607 (S.D.N.Y. 2009)). The Court concluded that the SEC pleaded facts sufficient to allege that the Defendants "were at least aware of improper accounting practices and did nothing to correct them or to otherwise ensure the strength of Penn West's internal controls."

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