DENVER (Legal Newsline) - Saying it didn’t want to identify “magic words” that protected securities issuers against fraud claims, the Colorado Supreme Court upheld the reinstatement of a class action against an oil company that boasted about its “experienced and professional workforce.”
Jagged Peak Energy’s statements in initial public offering documents went beyond “mere puffery” and could be shown misleading by the company’s subsequent poor performance, the state high court ruled in a Nov. 21 decision. Two justices dissented, including the court’s chief justice, saying the majority misapplied federal law by combining historical facts with optimistic statements about the future. The case drew friend-of-the-court briefs from a number of securities firms as well as the Securities Industry and Financial Markets Association.
The Oklahoma Police Pension and Retirement System sued Jagged Peak after its 2017 IPO, when it sold Jagged sold 31 million shares at $15 a share. After briefly turning up, the company’s shares fell and stayed below the IPO price. The plaintiffs sued under Rule 11 of the federal Securities Act, which prohibits misleading statements or omissions in offering documents.
The case was removed to federal court and then remanded back to state court, where the pension fund filed an amended complaint adding details to its claim that Jagged had overstated its ability to increase oil and gas production, had an “experienced and professional workforce” and an “ongoing focus” on improving performance and lowering costs.
The pension fund said both statements were false and misleading because it hired inexperienced contractors under unfavorable terms, who ran up costs and mismanaged projects. A trial court dismissed the claims and the pension fund appealed.
The appeals court reversed the dismissal, finding that the plaintiff had provided evidence “management knew, but did not disclose, that Jagged’s technical team was incompetent or unqualified and Jagged had awarded contracts that enriched its chief drilling contractor or were otherwise disadvantageous to Jagged.”
The appeals court rejected Jagged’s counterargument that it had actually lowered costs from 2014 to 2016, agreeing that the plaintiffs had showed performance was deteriorating by the time of the IPO.
Jagged appealed to the Colorado Supreme Court, arguing its statements were “non-actionable puffery” and the plaintiff claims were “pleaded with the benefit of hindsight.” But the Supreme Court upheld the appeals court.
“Puffery” means optimistic statements that can’t be proven or disproven, the court observed. But the plaintiffs had cited verifiable facts showing the company wasn’t living up to its claims of professionalism and cost-cutting, the court said. One of its two geologists was a recent college graduate, the court noted, and the track record of poor drilling site collection and errors contradicted the company’s statements about experienced and professional management.
“Even if the historical information regarding Jagged’s declining costs in the stated time period was accurate, the trend was allegedly in the opposite direction, and, if true, defendants had a duty to disclose that trend and its resulting uncertainty,” the court concluded.
Were the court to rule otherwise, it said it would “effectively create a form of `magic words’” including “experience,” “expertise” and “track record” that would protect defendants against claims of materiality.
Justice Monica Marquez dissented, joined by Chief Justice Brian Boatwright. Under federal securities law, companies must make “an untrue statement of material fact,” the dissenters said, and the statements the plaintiffs cited were not facts but “vague statements of corporate optimism.”
“Vague statements of corporate optimism cannot be propped up by nearby historical statements and data, and such puffery cannot be rendered material by looking to a plaintiff’s separate allegations that the statements are misleading,” the dissenting judges said.