On August 12, 2024, Judge David C. Godbey of the United States District Court for the Northern District of Texas denied a motion for judgment on the pleadings in an action alleging that an oil company (the "Company") and a former senior manager violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Yoshikawa v. Exxon Mobil Corp., No. 3:21-CV-0194-N (N.D. Tex. Aug. 12, 2024). According to plaintiffs, the former manager allegedly artificially inflated the net present value ("NPV") of certain oil and gas assets by using impossible drilling assumptions so that the valuation could support publicly-stated production forecasts. The Court denied defendants' motion for judgment on the pleadings, holding, among other things, that the complaint adequately alleged that the inflated valuation was incorporated into public statements.
Plaintiffs' initial complaint in the action asserted that the Company and several of its executives made misrepresentations and omissions regarding the value of its oil and gas assets. That complaint was dismissed for failure to adequately plead facts giving rise to a strong inference of scienter (previously covered here). Plaintiffs amended their complaint, again alleging misrepresentations and omissions under Rule 10b-5(b) and adding a scheme liability claim under Rule 10b-5(a) and (c). The Court dismissed all of plaintiffs' claims except for the scheme liability claim against the Company and a former senior manager who oversaw the planning of the oil and gas assets at issue. Yoshikawa v. Exxon Mobil Corp., No. 3:21-CV-0194-N, 2023 WL 5489054, at *9 (N.D. Tex. Aug. 24, 2023). The surviving scheme liability claim is based on allegations that the former manager purportedly mandated using aggressive "drilling learning curve" assumptions (which referred to the assumption that drilling speeds would increase the longer a drilling crew stayed in a certain area), until the estimated NPV of the oil and gas assets reached $50 billion, and that such assumptions were allegedly inconsistent with opinions from internal Company drilling experts. Plaintiffs further alleged that those drilling learning curve assumptions were purportedly incorporated into other metrics that were reported to investors, including proved reserves (the number of oil-equivalent barrels that could be extracted and sold with reasonably certainty) and resource base (proved reserves and other discovered resources expected to be ultimately recovered).
Defendants moved for judgment on the pleadings as to the remaining scheme liability claim, which the Court denied. First, the Court held that plaintiffs adequately pleaded that the manager's alleged conduct was "in connection with the purchase or sale of a security" and rejected defendants' argument that the alleged conduct was entirely internal to the Company. Specifically, the Court held that plaintiffs adequately pleaded that the allegedly fabricated learning curve assumptions were purportedly incorporated into the proved reserves and resource base that were reported to investors, and that factual disputes raised by defendants that those assumptions were not incorporated into those calculations could not be resolved based on the pleadings.
Second, the Court held that plaintiffs were entitled to a presumption of reliance under both Basic and Affiliated Ute. With respect to the Basic fraud-on-the-market presumption, the Court rejected defendants' argument that the presumption did not apply to scheme liability cases and held that the presumption applied in this case because plaintiffs alleged sufficient facts to show that the former manager's allegedly deceptive conduct was communicated to the public through reported numbers that were allegedly false. With respect to the Affiliated Ute presumption of reliance for alleged omissions, the Court held that plaintiffs were entitled to the presumption because their claims were primarily based on the former manager's non-disclosure of a fraudulent scheme and because a reasonable investor might have considered the alleged omissions to be important in making its decisions to purchase the security. The Court further asserted that defendants made no arguments to rebut this presumption of reliance and did not contend that the officer did not have a duty to disclose.
Finally, the Court found that plaintiffs adequately alleged facts giving rise to a strong inference of scienter and that the former manager's scienter could be imputed to the Company because the manager's allegedly fraudulent scheme resulted in the Company's issuance of false public statements. Finding that plaintiffs adequately alleged primary violations under Section 10(b), the Court additionally declined to dismiss the dependent Section 20(a) claims.
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