Southern District Of New York Dismisses Securities Claims Because Company Did Not Mislead Investors By Failing To Disclose Private Concern
06/27/2016On June 20, 2016, Judge Lorna Schofield of the United States District Court for the Southern District of New York dismissed a securities class action against Seadrill Limited (“Seadrill”), a Bermudan company that owns and operates sea-based oil rigs, and related parties. See In re Seadrill Ltd. Sec. Litig., No. 14 Civ. 9642 (S.D.N.Y. June 20, 2016). The Court granted the motion to dismiss because the alleged misrepresentations were either too vague to be actionable or were inactionable statements of opinion or optimism that were not inconsistent with the privately expressed concerns of company executives.
This case arose out of Russia’s 2014 invasion and annexation of the Crimean peninsula. In response, the U.S., E.U., and Norway imposed economic sanctions on Russia throughout 2014. While these sanctions were being imposed, Seadrill entered into several lucrative agreements with Rosneft OAO (“Rosneft”), an oil company that was majority owned by the Russian government. These agreements faced significant delays and one was ultimately terminated because of the sanctions against Russia. Plaintiffs claimed that several statements that Seadrill made concerning the Rosneft deal and the company’s dividend were false or misleading in violation of the Securities Exchange Act of 1934 because of defendants’ failure to disclose the risk that the sanctions posed to the transactions. According to the complaint, these statements also were misleading because company executives privately expressed concerns about the impact the sanctions could have on Seadrill that were not disclosed.
The Court held that plaintiffs did not sufficiently allege a material misrepresentation or omission for several reasons. First, several of defendants’ statements to the effect that they were “not very worried” about the sanctions were too vague and equivocal to mislead a reasonable investor about the risk that sanctions posed to the Rosneft deal. In addition, the Court held that these and other statements were not false or misleading because defendants accompanied their statements about Seadrill’s future performance with appropriate warnings. The Court also held that defendants’ positive statements about maintaining future dividends were inactionable because they were expressions of corporate optimism and because defendants had a reasonable basis for their optimism.
Lastly, the Court held that the complaint failed to allege that defendants possessed the requisite level of intent to commit securities fraud. Because the complaint itself indicated that defendants were attempting to understand the implications of sanctions on the Rosneft deal, the non-culpable explanation that defendants themselves had not determined whether the sanctions would impact the deal was more compelling than plaintiffs’ claims of fraudulent intent.