In Sinay v. CNOOC Ltd., No. 13‒2240, 2014 WL 350055 (2d Cir. Feb. 3 2014), the Second Circuit affirmed the district court’s dismissal of a putative class action for failure to plead scienter with particularity.
A putative class alleged that CNOOC Ltd. (Defendant) made false and fraudulent statements to investors relating to: (i) the safety of an oilfield it owned and developed with another oil producer and (ii) two major oil spills off the northeastern coast of China. The class brought claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b‒5 of the Exchange Act. Prior to the oil spills, Defendant lauded its commitment to safety in multiple press statements. After the spills, Defendant reassured investors that it and its partner had the spills under control. At the trial-court level, Defendant moved to dismiss both claims. The district court granted the motion to dismiss, finding that the class had not adequately pleaded scienter.
The Private Securities Litigation Reform Act requires that parties bringing securities fraud claims plead facts that “giv[e] rise to a strong inference that the defendant acted with the required state of mind.” This may be shown by pleading facts that the defendant had “motive and opportunity,” or that there was “circumstantial evidence of conscious misbehavior or recklessness.”
On appeal, the class argued that the district court erred in concluding that the facts as pleaded did not show Defendant “must have known” of the falsity of its statements—which would have satisfied the scienter requirement. Specifically, the class pointed to a State Oceanic Administration Report that found the spills were derivative of “flaws in the system and management” and Defendant’s partner’s violation of a development plan.
In affirming the district court’s finding, the Second Circuit agreed that the report was insufficient to meet the required pleading standards. The court held that, even if the report was true, the facts did not “establish a ‘strong inference’ of scienter.” Simply, the facts as pleaded did not establish that the problems that caused the spills were “so obvious” that Defendant must have been aware of them.
Based on the facts pleaded, the court was left with no choice but to affirm the lower court’s dismissal of the putative class action.
The primary materials for this case may be found on the DU Corporate Governance website.