Southern District Of New York Pares Claims In Putative Class Action Against Energy Company
On March 7, 2022, Judge P. Kevin Castel of the Southern District of New York granted in part and denied in part a motion to dismiss a putative class action asserting claims under the Securities Exchange Act of 1934 against a coal mining company and certain of its executives. In re Peabody Energy Corp. Sec. Litig., No. 20-cv-8024 (PKC), slip op. (S.D.N.Y. Mar. 7, 2022), ECF No. 50. Plaintiff alleged that the company made misrepresentations concerning its safety practices, a fire that took place at one of its mines, and its ability to subsequently reopen that mine and resume operations. The Court held that the complaint adequately alleged misrepresentations and scienter with respect to the mine fire but dismissed the remaining challenged statements as non-actionable puffery, protected forward-looking statements, or statements of opinion.
The Court first assessed the timeliness of certain claims that challenged statements concerning the company’s commitment to safety. Defendants argued that the claims were untimely because they were filed more than two years after the company disclosed the mine fire; this meant, according to defendants, that the claims were not brought within two years of when plaintiff discovered or reasonably should have discovered the facts underlying the alleged misstatement, as required by the Exchange Act’s statute of limitations. Slip op. at 21. The Court, however, rejected defendants’ arguments that the disclosure of the fire would have made it obvious to a reasonably diligent investor that other statements regarding the company’s safety practices were false. Id. at 22.
The Court next evaluated statements the company made concerning the mine that caught fire, concluding that plaintiff adequately alleged that those statements constituted actionable misrepresentations. Plaintiff argued that the company made a series of statements days after the fire broke out that were misleading, because they failed to disclose that the mine was then on fire. Id. at 11-12. For instance, the company stated that gas levels at the mine “have been variable and remain elevated,” that the company was working with mining inspectors to “continue a progress plan aimed at reducing gas levels and accommodating a safe return to mining operations,” and then separately stated that personnel had observed smoke coming from the mine. Id. The Court held that plaintiff adequately alleged that such statements were misleading, explaining that defendants had “a duty to disclose the whole truth” in their statements regarding conditions at the company’s most profitable mine, namely, that there was likely a fire burning at that mine. Id. at 24.
With respect to statements the company had made prior to the fire concerning its commitment to safety, the Court explained these statements were non-actionable puffery or otherwise were not adequately alleged to be false. The Court first explained that statements touting the importance of safety—such as “safety is the most important” and that the company “maintains constant vigilance toward safety”—were puffery as they were simply too “general and self-congratulatory” to have been relied upon by a reasonable investor. Id. at 25–26. With respect to statements touting the company’s safety record—such as that the company “achieved record safety this past year” and that at “the operational level, our global safety performance continues to surpass industry averages”—the Court concluded that plaintiff failed to plausibly allege that the statements were false when made. Id. at 28. While plaintiff alleged that the company was on notice of certain safety issues at the mine, the Court noted that the company had also disclosed the risk of mine fires and the possibility that fire could disrupt operations, such that the challenged statements were not misleading in context. Id. at 29.
The Court then addressed statements the company made following the fire concerning its ability to resume mining operations. The Court concluded that all these statements were non-actionable, forward-looking statements or non-actionable statements of opinion. For example, when the company announced the mine was on fire, it noted that it “did not expect any production from [the mine] in the fourth quarter of 2018,” and that “[i]t is too early to assess the full financial impact to future periods as a result of the ongoing issue.” Id. at 31. The Court explained that plaintiff failed to allege that the first forward-looking statement was false, and that the second statement was accompanied by cautionary language that it was “too early to assess” the situation in full. Id. In addition, the Court explained that a challenged statement that the company’s efforts to extinguish the fire had “yielded visible results” was a non-actionable opinion statement and plaintiff failed to allege that it was misleading when considered in the context of the ongoing response to a major fire. Id. at 32.
With respect to scienter, the Court held that plaintiff raised a “cogent and compelling inference” of scienter, on a theory of conscious misbehavior or recklessness, as to the statements failing to promptly disclose the mine fire. Id. at 43. The Court emphasized that the company had assembled a task force that included the CEO and CFO to assess the situation at the mine, and that the task force was in place at the time that smoke was observed coming from the main fan shaft of the mine. Id. The Court determined that plaintiff adequately alleged that the CEO and CFO knew either on the day the fire started or shortly thereafter that the mine was on fire, and yet allowed statements to be issued to the public that omitted any references to “smoke” or “fire.” Id. at 44.
Lastly, the Court declined to dismiss plaintiff’s control person claims against the company’s CEO and CFO, emphasizing their role on the company’s task force at the time of the mine fire and their involvement in coordinating the company’s public response to the fire. Id. at 44–45.