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Northern District Of Texas Dismisses Putative Class Action Against Oil And Gas Company For Failure To Allege Scienter
10/11/2022On September 29, 2022, Chief Judge David C. Godbey of the United States District Court for the Northern District of Texas dismissed a putative class action asserting claims under the Securities Exchange Act of 1934 against an oil company and certain of its officers. Yoshikawa v. Exxon Mobil Corp., No. 3:21-CV-00194-N, 2022 WL 4677621 (N.D. Tex. Sept. 29, 2022). Plaintiffs alleged that the company made misrepresentations in connection with the company’s purchase of certain oil and gas assets and its expected production from those assets. The Court held that plaintiffs failed to adequately allege scienter but granted plaintiffs’ request for leave to amend with respect to certain alleged misstatements as to which the Court held plaintiffs had alleged a plausible theory of falsity and materiality.
Concluding that dismissal was required because plaintiffs had not adequately pleaded the necessary strong inference of scienter, the Court explained that plaintiffs’ scienter allegations were “largely impermissible group pleading” because they failed to distinguish each defendant and his or her specific connection to a challenged statement. Id. at *3. The Court rejected plaintiffs’ argument that it was sufficient to make allegations as to “senior [company] management,” “corporate officials,” or “executives”; rather, the Court emphasized that “an officer’s position on its own is insufficient to support an inference of scienter.” Id. Similarly, the Court rejected as vague and conclusory the allegation that it was “common knowledge throughout the company” that a particular production goal was not attainable. Id. The Court also rejected the argument that knowledge should be imputed to individual executives under the “core operations” doctrine, which the Court emphasized was only potentially applicable in “rare case[s]” and “special circumstances” not alleged by plaintiffs. Id. at *4. And the Court rejected plaintiffs’ scienter arguments based on the company’s alleged use of nondisclosure agreements and the existence of an SEC investigation — which the Court noted had been closed. Id.
Having disposed of plaintiffs’ “group pleading” allegations, the Court also evaluated and rejected plaintiffs’ remaining scienter allegations that were directed to individual defendants. The Court first considered and rejected plaintiffs’ scienter arguments as to the company’s CEO, who allegedly signed a public letter and several SEC filings and made public statements regarding the company’s success in the relevant geographical area while allegedly knowing that “drilling times, production rates, and resource estimates were worse than [the company] was indicating.” Id. While plaintiffs alleged that the CEO spoke about his knowledge of the relevant geographical area, the Court found this statement to be vague and insufficient to show that the CEO did not believe the challenged statements. Id. at *5. The Court also explained that the allegation that the CEO engaged in a site visit was not accompanied by any detail showing that the CEO learned of the issues alleged by plaintiffs. Id. The Court further concluded that plaintiffs’ allegation that the CEO communicated with “executives” was not enough to show that the CEO had specific communications with one particular executive regarding reserves calculations that plaintiffs contended were falsified. Id. The Court similarly rejected plaintiffs’ argument that the CEO had access to reserves and production data, which the Court emphasized failed to show that the CEO actually had knowledge of information contradicting the challenged statements, particularly given that plaintiffs also alleged that certain records were inaccurate. Id. at *6. Finally, the Court rejected arguments that the CEO was motivated by his compensation package — which the Court noted was a motive common to nearly every corporate executive — and signed Sarbanes-Oxley certifications, which the Court determined were not alleged to have contained “any issues glaring enough” to alert the CEO that challenged statements were misleading. Id. The Court concluded that these allegations, taken together, were insufficient to establish scienter based either on actual knowledge or severe recklessness. Id. at *7.
The Court rejected for similar reasons plaintiffs’ scienter allegations regarding other defendants that were based on their alleged understanding of the geographical area, attendance on a site visit, compensation structure, and position in “senior management.” Id. The Court also rejected plaintiffs’ allegations that certain executives engaged in suspicious stock sales; to the contrary, the Court determined that their trades “were not suspicious” either in size or amount, as they ranged from 8% to 25% of the individuals’ portfolios. Id. Moreover, the Court observed that the allegation that only certain defendants engaged in suspicious stock sales undermined an inference of scienter, as it “seems implausible that some Defendants and not others would profit” when all defendants were “allegedly acting in concert to artificially inflate share prices.” Id. Finally, the Court rejected plaintiffs’ allegation that scienter should be imputed based on the alleged knowledge of one employee who was not an executive and was not alleged to have had made any challenged statement. Id. at *9.
While emphasizing that plaintiffs’ claims failed for failure to establish scienter, the Court nevertheless addressed defendants’ remaining arguments “to provide guidance if Plaintiffs choose to amend.” Id. The Court determined that various statements were forward-looking statements accompanied by meaningful cautionary language and were therefore protected by the safe-harbor provision in the Private Securities Litigation Reform Act (“PSLRA”). Id. at *10-11. The Court explained that the company’s risk disclosures were not mere boilerplate but described the risks that actually materialized, and plaintiffs had not sufficiently alleged that those risks had already materialized at the time the challenged statements were made. Id. at *11. However, while the Court determined that statements that the company was “on track” to meet production targets were forward-looking, the Court concluded that certain statements were actionable to the extent they also mentioned immediately measurable details, such as that “extensive well inventory supports [the] production profile” and that the company was exceeding its pace from the prior year by “about 20,000 barrels a day.” Id. at *12-13.
Finally, the Court evaluated arguments regarding materiality and falsity. The Court declined to dismiss allegations that the company’s estimates of “Proved Reserves” were inaccurate, concluding that plaintiffs had sufficiently alleged falsity based on testimony from several employees and that alleged errors in accounting were sufficient to show materiality at the pleading stage. Id. at *13-14. In addition, the Court determined that various optimistic statements regarding the company’s drilling progress and “unique position” relative to competitors were non-actionable puffery where they lacked connections to specific facts. Id. at *15-16. However, the Court held that statements regarding the company’s process for estimating “Proved Reserves” were actionable because “Proved Reserves” was a “term of art” in the industry with a specific meaning for accounting purposes and therefore “could affect a reasonable investor’s decision-making.” Id. at *16. Last, the Court rejected plaintiffs’ argument that an investor presentation purporting to show the company’s position relative to certain competitors was misleading because other companies allegedly outperformed the company in certain metrics. The Court explained that the presentation did not claim that the company was the number one performer in any category, and that to find an omission claim actionable in this context would “render it virtually impossible for corporations to present data to investors without inundating every slide and document with likely irrelevant and unhelpful information.” Id. at *17.
