On July 16, 2019, the United States Court of Appeals for the Fifth Circuit affirmed a decision by the United States District Court for the Northern District of Texas that dismissed a putative class action against the oil and gas pipeline operator Plains All American Pipeline, certain of its officers, directors and related parties, and the underwriters for the securities offerings at issue. Police & Fire Ret. Sys. of the City of Detroit v. Plains All Am. Pipeline, L.P.
, —Fed. App’x—, 2019 WL 3213543, slip. op. (5th Cir. 2019). As discussed in our prior post
, plaintiffs, investors who purchased equity and debt instruments issued by entities affiliated with Plains All American Pipeline in seven different public offerings, brought claims under the Securities Exchange Act of 1934 and the Securities Act of 1933, alleging that statements regarding the company’s compliance program were false in light of events surrounding a May 2015 oil spill. The district court dismissed plaintiffs’ second amended complaint with prejudice, finding that plaintiffs either did not allege an actionable misstatement or did not sufficiently plead scienter. The Fifth Circuit affirmed.
The Fifth Circuit first determined that a number of alleged misstatements were not actionable because they constituted non-actionable “corporate cheerleading,” including affirmations of the company’s “commitment to safety, goals it was seeking to reach, and outlines of procedures.” Slip op. at 7-8. The Court also agreed with the lower court that two statements claiming that the company “believed it was in compliance with the law and with its own risk management program” were broadly applicable “belief statements” that were not rendered false and misleading due to compliance failures affecting two oil pipelines that constituted a small percentage of the company’s overall pipeline operations. Id
In addition, the Court held that statements describing internal processes and procedures were not false because the processes and procedures actually existed, even though they proved inadequate, and a statement describing how the oil spill had progressed up to a certain point in time was not false simply because further information was discovered later. Id.
Moreover, the Court noted that the company was not responsible under the securities laws for correcting misstatements made by third parties, in this case, a misstatement by a legislator in a question posed during testimony by a company executive before a legislative committee. Id.
As to two alleged misstatements, the Court affirmed the lower court’s determination that, although plaintiffs had adequately alleged that the statements were false or misleading, they failed to adequately plead scienter. Id
. at 8-9. With respect to an unattributed statement on the company’s website that it “perform[s] scheduled maintenance on all of [the company’s] pipeline systems and make[s] repairs and replacements when necessary or appropriate,” the Court held plaintiffs failed to link the statement to a specific individual who possessed the requisite scienter, and that plaintiffs’ allegations that executives referred investors to the website were insufficient. Id.
at 9. The Court also rejected the argument that the individual defendants must have been involved in creating the statements because their positions were relevant to the subject matter, holding that the statements were not technical and did not necessarily require senior-level expertise to formulate. Id.
With respect to a separate statement made by a company executive to a legislative committee that the company had “no indication” that there was anything wrong with the pipeline in question, the Court found “convincing” plaintiffs’ argument that the company knew of an increase in corrosion issues and was aware that in many areas corrosion had eaten away over 50% of the pipe wall, and as such the company was at least “severely reckless” in failing to adequately prepare the executive to testify. Id.
at 10. However, because these arguments were made only on appeal—particularly in the reply brief—the Court affirmed the district court’s holding that the complaint failed to plead scienter with sufficient particularity.
The Court also considered whether alleged misrepresentations in certain contracts with the underwriters, which were then filed with the SEC, were actionable. The Fifth Circuit agreed with the district court’s conclusion that the statements were not pled with sufficient particularity, but the Court emphasized that it was not holding that statements in underwriter agreements were necessarily non-actionable per se
, as it was not necessary to reach that issue on the facts of this case. Id.