Class Action Alleging Violations of Federal Securities Laws based on Oil Company’s “Proved Reserves” Estimates in Public Offering Documents Warranted Dismissal because Cautionary Language Warned Reasonable Investor of Risk of Lower Reserves Texas Federal Court Holds
Plaintiff filed a putative class action against Cano Petroleum (an independent oil and natural gas company) and individual officers and directors of Cano, as well as defendants involved in the underwriting of Cano’s secondary public offering, alleging violations of federal securities laws; specifically, the class action complaint alleged that the documents issued in connection with the secondary public offering contained material misrepresentations in violation of Sections 11, 12 and 15 of the Securities Act of 1933. Truk Int’l Fund LP v. Wehlmann, ___ F.Supp.2d ___ (N.D.Tex. December 3, 2009) [Slip Opn., at 2-3.] According to the allegations underlying the class action complaint, defendants’ disclosures concerning Cano’s “proved reserves” were significantly overstated. Id., at 3-4. The class action further alleged that only one month after the secondary public offering, Cano’s CEO announced that the company’s proved reserves had declined by roughly 20%. Id., at 4-5. Following that announcement, Cano’s stock price fell “sharply and immediately.” Id., at 5. Defense attorneys moved to dismiss the class action on various grounds, see id., at 5-6. The district court granted the motions.
The district court began by summarizing public information relevant to the motion, see Truk, at 7-13, as well as the applicable standards governing the defendants’ motions, see id., at 13-15, and the relevant provisions of the Securities Act, see id., at 15-20. Focusing on the central allegations underlying the class action claims, see id., at 20-23, the district court first held that “[t]he cautionary statements in the Offering Documents made clear that the proved reserve numbers stated in the documents were estimates as of June 30, 2007, and that a large number of factors could cause the estimates to be lower if recalculated as of the date of the offering,” id., at 23. The new estimates had been based on a new estimate provided June 30, 2008, and were the result of circumstances that the Offering Documents warned could lead to a reduction in the proved reserves estimate. Id., at 24. In the federal court’s view, “a reasonable investor would know from reading the cautionary language in the Offering Documents that an investment in Cano was risky and that a part of that risk was in the uncertainty as to the quantity of proved reserves.” Id., at 28. Accordingly, the court granted the motions to dismiss the class action claims. Id., at 28, 30-31. The court also denied leave to amend, noting that “the nature of the pleading deficiencies suggest that repleading would be futile” and that “defendants should not be subjected to further costs of litigation.” Id., at 30.