April 4, 2019
On March 13, 2019, in Edgar v. Anadarko Petroleum Corp., No. H-17-1372, 2019 WL 1167786 (S.D. Tex. Mar. 13, 2019), the U.S. District Court for the Southern District of Texas dismissed a shareholder lawsuit against Anadarko Petroleum Corporation (“Anadarko”) and several of its executives because the plaintiff failed to show that Anadarko’s management knowingly misled investors about the company’s safety compliance.
Anadarko is a publicly traded oil and gas exploration and production company with operations primarily in Texas, the Gulf of Mexico, and Colorado. On April 17, 2017, a home exploded near an Anadarko well in Firestone, Colorado, killing two people and critically injuring another. On April 26, 2017, Anadarko announced that one of its wells might have been involved in the explosion and that the company planned to shut down 3,000 similar wells in Colorado. Anadarko’s stock price fell by 4.7% the next day. On May 2, 2017, the Firestone-Frederick Fire Department confirmed the link between Anadarko’s well and the Firestone explosion. A return line that was connected to the Firestone well leaked methane into the home’s drains, which exploded when a hot water header was being installed. By abandoning the flowline without disconnecting and sealing it, Anadarko had violated Colorado Oil and Gas Conservation Commission Rule 1103. On May 3, 2017, Anadarko’s stock price fell by 7.7%.
The Iron Workers Benefit and Pension Fund, as lead plaintiff for a putative class of investors, sued Anadarko and its executive committee, alleging that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 thereunder by making material misrepresentations in Anadarko’s public filings and other communications with respect to the company’s compliance with health, safety, and environmental laws and regulations. The defendants moved to dismiss the complaint, which the district court granted without prejudice but with leave for the plaintiff to amend its claims, citing, among other points, the plaintiff’s failure to explicitly and precisely set out why each purportedly misleading statement was false or misleading and why the speaker knew, or recklessly disregarded the fact, that the statement was misleading.
The plaintiff filed an amended complaint, alleging that the defendants made the following material misrepresentations in violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5: (i) a fact sheet dated February 8, 2016, authorized or approved by Anadarko’s vice president of corporate communications, stating that Anadarko’s Wattenburg, Colorado operations center “[p]rovides real-time remote-monitoring capabilities for 6,800+ wells” and “[e]nables employees to shut in wells remotely”; (ii) Anadarko’s annual report on Form 10-K for the fiscal year ended on December 31, 2015, filed with the Securities and Exchange Commission (the “SEC”), signed by the company’s chief executive officer, stating that the company “believes that it is in material compliance with existing environmental and occupational health and safety regulations”; (iii) health, safety, environment, and sustainability overviews dated March 12, 2016, and March 3, 2017, and signed by the chief executive officer and vice president for the health, safety, and environment division of the company, stating that “Anadarko operates its global onshore and offshore operations in compliance with the applicable laws and associated regulations”; (iv) Anadarko’s registration statement on Form S-3 filed with the SEC on August 12, 2016, incorporating the 2015 Form 10-K; and (v) an underwriting agreement filed with the SEC in September 2016, representing to an underwriter that Anadarko has “been in compliance with all applicable [laws] and other legally enforceable requirements relating to the prevention of pollution, the preservation of environmental quality, the protection of natural resources, or the remediation of environmental contamination.” The defendants again moved to dismiss.
The central issue in Edgar v. Anadarko was whether the amended complaint had sufficiently alleged scienter as to Anadarko’s executives under Section 10(b) of the Exchange Act and Rule 10b-5, where “[t]he required state of mind is an intent to deceive, manipulate, or defraud, or severe recklessness.”
In its published opinion, the court analyzed the alleged misrepresentations of each Anadarko executive, starting with those contained in the fact sheet authorized or approved by Anadarko’s vice president of corporate communications. The amended complaint alleged that the statements in the fact sheet about remote-monitoring capabilities were false because half of Anadarko’s Wattenberg Field wells in Colorado were not equipped for any sort of remote interaction, a fact that was described in PowerPoint slides for, and discussed at, one or two of the biannual meetings, the majority of which the corporate communications executive attended. The court determined that the amended complaint (i) did not properly plead that the executive had knowledge of the statement’s falsity and (ii) improperly relied on the executive’s title to allege that he approved or authorized the fact sheet, without alleging specific facts linking the executive to the challenged statements contained therein. Accordingly, the court concluded that allegations did not support an inference that the executive “made” the challenged statement as required for liability under Rule 10b-5 and that even if the executive had made the statements in the fact sheet, the amended complaint failed to allege facts sufficiently supporting a strong inference that he did so with scienter.
The court then held that the amended complaint failed to allege facts supporting a strong inference that the chief executive officer or vice president for the health, safety, and environment division of Anadarko had a motive to make false, material misstatements to investors. The court noted that to sufficiently plead that a defendant engaged in securities fraud to inflate the price of a company’s stock, a plaintiff must allege that the defendant profited from the inflated stock value or stock offerings. The amended complaint contained no allegation that either officer personally profited from Anadarko’s stock offering completed in 2016. Moreover, the court determined that a general motive to improve a company’s financial condition, one universally shared by all companies and executives, does not suffice to establish an inference of scienter of fraud. According to the court, the facts presented in the amended complaint at most supported an inference that the vice president for the health, safety, and environment division of Anadarko should have known that the company’s Colorado operations were unsafe and, therefore, in violation of Colorado law, but any such inference or theory erroneously “conflates safety with legal compliance” and improperly “reduces scienter to negligence.” As to Anadarko’s chief executive officer, the court found that the amended complaint contained no allegation that the executive attended any particular meeting at which state-specific well and flowline concerns were discussed, only speculation that such a meeting might have occurred.
The court dismissed the amended complaint with prejudice and without leave for the plaintiff to further amend its claims, noting that “further amendment would be futile.” Although the holding in Edgar v. Anadarko is fact-specific, the case demonstrates that to withstand a motion to dismiss, a complaint involving allegations of fraud must plead with particularity the circumstances constituting the alleged fraud, including with respect to the element of scienter. Notwithstanding the plaintiff’s failure in this case to allege facts supporting a strong inference of scienter, issuers should be careful about making general statements of compliance with respect to applicable laws because any such statements can form the basis of a shareholder lawsuit (and with slightly different facts, one that could withstand a motion to dismiss or result in liability).
If you have any questions regarding this decision or how it may affect your business, please contact Edward Shaoul.