In re Cobalt Int'l Energy, Inc. Sec. Litig.: Claims of Security Act and Exchange Act Violations Survive Motion to Dismiss by Company
In In re Cobalt Int'l Energy, Inc. Sec. Litig., 2016 BL 12955, 15 (S.D. Tex. Jan. 19, 2016), the District Court for the Southern District of Texas granted in part and denied in part Cobalt's motion to dismiss the consolidated class action complaint by St. Lucie County Fire District Firefighters' Pension Trust Fund, Fire and Police Retiree Health Care Fund San Antonio, and GAMCO (collectively "Plaintiffs").
According to the allegations, Cobalt formed in 2005 as an exploration and production company. In 2007, it negotiated an agreement with Sonangol, an Angolan national oil company, for oil exploration of three blocks in offshore Angola. Cobalt drilled two exploration wells: Lontra, which yielded substantially more gas than estimated to which Cobalt had no rights, and Loengo, which did not yield any oil.
In May 2015, the Plaintiffs, who were purchasers of Cobalt securities, filed a consolidated amended class action complaint against Cobalt, its executives, various entities that administered the distribution of Cobalt's securities ("Underwriter Defendants"), and various entities that had the authority to control the company (Control Defendants). This complaint alleged Cobalt and its executives violated: Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. Plaintiffs further alleged: Cobalt, its directors, and the Underwriter Defendants violated Section 11; the Control Defendants violated Section 15 of the Securities Act; and the Underwriter Defendants violated Section 12(a)(2) of the Securities Act.
A 10(b) claim for publicly traded securities must show: (1) a material misrepresentation or omission, (2) in connection with the purchase or sale of a security, (3) scienter by the defendant, (4) justifiable reliance by the plaintiff, (5) damages, and (6) the material misrepresentations caused the loss.
Further, for a Section 11 claim, a plaintiff must prove reliance on the misrepresentation in the registration statement if the plaintiff acquired the security after the issuer made an earning statement available for at least 12 months. Section 11 claims are barred by a three-year statute of repose after the security was offered to the public and have a one-year statute of limitations from the discovery of the untrue statement or omission that created the claim.
The court determined that Plaintiffs had adequately alleged falsity with respect to statements that two wells were "large and oil-focused" with oil quantities potentially exceeding one billion barrels when Cobalt ostensibly knew that Lontra was primarily gas and that Loengo did not have “even a remote chance” of producing oil. Additionally, the court found testimony of confidential witnesses and Cobalt insiders was sufficient to show scienter. The court reasoned that the Plaintiffs' allegations about the market for Cobalt common stock adequately demonstrated reliance because the bonds were convertible to common stock. Finally, because Plaintiffs adequately alleged violations of Section 10(b) and Section 11, the court held claims for violations of Section 20 and Section 15 are not subject to dismissal.
The court also determined the Plaintiffs timely filed their original complaint less than three-years after Cobalt's registration statement, and within the statute of repose. However, the court was unable to determine as a matter of law when the statute of limitations began to run and thus granted the Underwriter Defendants' motion to dismiss with leave for Plaintiffs, who purchased Cobalt securities after April 30, 2013, to replead a Section 11 claim.
Accordingly, the court denied Cobalt's motions to dismiss the Section 10(b) and Section 20(a) of the Exchange Act claims, and the Section 12 and Section 15 of the Securities Act claims. However, the court granted the Underwriter Defendants' motion to dismiss the Section 11 claim with leave to replead.
The primary materials for this case may be found on the DU Corporate Governance website.