On 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.
Yoshikawa v. Exxon Mobil Corp.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.