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A securities violation suit over alleged misrepresentations with Northern Oil and Gas' code of conduct and ethics for its executives was dismissed Thursday by U.S. District Judge Edgardo Ramos of the Southern District of New York.

The suit alleges that the energy company misled investors in its public filings after one of its executives faced U.S. Securities and Exchange Commission violations, despite knowingly being subject to the codes of conduct.

Michael Reger was the company's CEO and Thomas Stoelk its CFO during the relevant time period. Reger's attempts to hide his financial and personal involvement in a wholly separate company from Northern Oil during the relevant time period eventually earned the attention of the SEC. Stoelk's role was to aid his co-executive by allowing him to effectively cede day-to-day operations to Stoelk to allow Reger to pursue his interests in the side company, Dakota Plains, sometimes to the detriment of Northern Oil.

Investor Jeff Fries brought the suit, alleging that the company's SEC filings were false and misleading because the executive code of conduct attested to in those filings was being flagrantly disregarded by the individual defendants. Further, the company's touting of Reger's executive abilities was misleading, considering his actions, which were themselves harmful to investors.

Ramos on Thursday rejected all of plaintiff's arguments. Adopting a code of ethics is not itself misleading if there's an undisclosed ethics breach, he said. Likewise, there was no guarantee made by the company, nor representations of historical compliance, that would have made the undisclosed breach actionable. The code, as noted in case law cited by Ramos, is inherently aspirational.

“The code merely lays out Northern Oil's policies, including prohibited employee conduct, and notes what Northern Oil 'promotes' and what Northern Oil employees 'should' do,” the judge wrote.

On the claims of a breach due to a failure to disclose corporate mismanagement or uncharged criminal conduct, Ramos said action was only possible if the nondisclosure rendered other statements by defendants misleading. Plaintiffs argued that the company's promotion of Reger's qualifications—his expertise and family connections to the industry—qualified as such, considering his actions.

However, Ramos notes that these statements were never claimed as inaccurate themselves by the plaintiffs, and the company's statements never said that Reger was specifically not engaging in inappropriate outside business activities.

Beyond these items, Ramos agreed with defendants that plaintiffs failed to prove scienter, a critical, heightened threshold for proving securities fraud under the Private Securities Litigation Reform Act. Proceeding under the conscious misbehavior or recklessness standard, plaintiff pointed to conversations Stoelk had with a cooperator about Reger's lack of involvement on a day-to-day basis and the work he did for the side company while on the clock for Northern Oil.

The problem, Ramos said, was that none of the allegations addressed whether the company was aware what he was doing was illegal, was violating its code of ethics, or was “improperly abdicated his responsibilities as CEO.” It was even uncertain, based on the allegations, whether Northern Oil's relationship with Dakota Plains “was collaborative or created a conflict of interest.” Nor was Reger's actions shown to be sufficiently reckless.

“Defendants may not have disclosed Reger's uncharged involvement with Dakota Plains because there was no reason to believe that Reger's conduct was improper when Defendants made the disclosures, and because Reger believed during the Class Period that the success of Dakota Plains would benefit Northern Oil investors,” Ramos said. “Indeed, when Reger received a Wells Notice from the SEC, Northern Oil terminated him, which undermines scienter.”

Plaintiff was given permission to amend the complaint.

Northern Oil was represented by Latham & Watkins partner Jeff Hammel. In a statement, he said his clients were pleased with the court's “well-reasoned decision.”

Fries' legal team at Pomerantz was led by associate Louis Ludwig. Attempts to reach Ludwig and other attorneys on the case from the firm were unsuccessful.