United States: Southern District Of Texas Dismisses Putative Class Action Against Oil And Gas Exploration Company For Failure To Adequately Allege Scienter

On March 13, 2019, Judge Lee H. Rosenthal of the United States District Court for the Southern District of Texas granted a motion to dismiss claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder in a putative class action against an oil and gas exploration and production company and certain of its officers.  Edgar v. Anadarko Petroleum Corporation, et al., No. 17-cv-01372 (S.D. Tex. Mar. 13, 2019).  After the Court dismissed the prior amended complaint as noted in our prior post, plaintiff filed a second amended complaint attempting to add allegations supporting an inference of scienter.  The Court held, however, that the amended complaint still failed to adequately allege scienter, and therefore dismissed the action with prejudice.

In dismissing the prior complaint, the Court held that claims based on the company's statement that its operations were in compliance with applicable laws—even if untrue because the company allegedly violated a Colorado Oil and Gas Conservation Commission rule—nevertheless failed to adequately plead scienter because they did not show that the individual officer defendants were aware of a failure to comply with the Commission's rule at the time the statement was made.  The amended complaint attempted to address that deficiency with allegations against three individual defendants.

With respect to the first individual defendant, plaintiff alleged that a factsheet posted to the company's website and allegedly approved by that defendant falsely stated that the company could remotely monitor all of its wells in Colorado.  Slip op. at 14-15.  Plaintiff alleged that the defendant should have known the factsheet was false because he attended the "majority" of biannual meetings discussing important topics or else sent a representative, and that during "one or two" of the meetings the fact that only half the wells had remote monitoring and control capabilities was described in PowerPoint slides.  Id. at 15.  The Court held, however, that these allegations failed to adequately plead scienter because the allegation that the defendant approved the factsheet was based solely on defendant's title and, therefore, did not adequately support an inference that he "made" the statement, as required under Section 10(b) and Rule 10b-5.  Id. at 17.  Moreover, even if the defendant was deemed to have "made" the statement, the Court held, scienter could not be inferred from the mere fact that the defendant went, or sent a representative, to biannual meetings without particularized facts indicating which meetings defendant attended, when the relevant information was presented, whether the defendant specifically received or reviewed presentation materials, and whether specific concerns were relayed to him.  Id. at 18.  The Court also rejected an inference of scienter based on the allegation that an employee raised concerns about Colorado staffing issues, holding that this complaint was about personnel strength, not remote monitoring and control capabilities; and in any event the concerns were raised after the factsheet was posted on the company's website.  Id. at 19.

Regarding two other individual defendants, the Court rejected plaintiff's arguments that they had the motive to commit fraud because the company's losses from environmental fines and settlements required it to raise cash through a stock offering.  Id. at 20.  The Court held that this was impermissible "group pleading," and that the desire to raise capital in the normal course of business does not support a showing of scienter "because virtually all corporate insiders share this goal."  Id. at 21-22.  Moreover, the Court emphasized that the company conducted the stock offering at issue two years after posting the loss from the fines and settlements, plaintiff failed to allege that the company was in critical negotiations to seek financing or needed to raise a certain amount of money to complete a "crucial" transaction, and most of the company's losses during this time period were from the collapse of oil prices, not environmental fines and settlements.  Id. at  22.  Additionally, plaintiff failed to assert that the defendants personally benefited from the offering.  Id. at 23.   

In addition, the Court addressed allegations of circumstantial evidence against the same two defendants.  Plaintiff alleged that one defendant was reckless is not knowing that the company's policy and practice violated Colorado law, recklessly ignored that the company did not know the location of every Colorado flow line, as required by Colorado law, and had access to information showing conditions that could adversely affect the safe and proper operations of the company's pipeline.  Id. at 26-28.  The Court held that these allegations failed to give rise to a strong inference of scienter because they lacked particularized facts indicating that the defendant knew, or was told, that the company was violating Colorado law.  Id. at 28.  Instead, the allegations at most supported an inference that the defendant should have known the company's operations were unsafe, which "conflates safety with legal compliance and reduces scienter to negligence."  Id. at 30.  The Court found scienter inadequately pleaded against the other defendant because allegations that he attended certain of the biannual meetings and received other presentations and reports from managers did not show when, and if, he ever learned that the company violated Colorado law.  Id. at 33.

The Court also rejected plaintiff's argument that defendants had a "duty to confirm" before making the statement that the company complied with all laws.  The Court determined that neither of these defendants had a duty to confirm statements about compliance, as they were not specifically responsible for compliance with the Colorado Commission Rules, and there were no allegations that they were specifically informed of the Colorado law violations.  Id. at 35-36.

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