Apache Corp. Can’t Dodge Investor Suit Over Dud Drilling Plan

Nov 2022 // Law360

Apache Corp. failed to show that investors’ consolidated proposed class action over a Permian Basin oil and gas discovery was improperly pled, with a Texas federal judge on Tuesday upholding the claims that the energy giant hyped up the investment despite knowing it was a dud.

U.S. District Judge George C. Hanks Jr. issued an order stating he was adopting in full a report and recommendation issued by U.S. Magistrate Judge Andrew M. Edison in September denying Apache’s motion to dismiss.

Judge Edison’s September report rejected all of Apache’s arguments for dismissal, even though he admitted that the plaintiffs’ scienter allegations were a “very close call.”

When determining whether to uphold the scienter claims, Judge Edison said he relied on the Fifth Circuit’s instruction that “where there are competing inferences that establish or negate the scienter requirement, ‘a tie favors the plaintiff’ on a motion to dismiss.”

“Lead plaintiffs’ scienter allegations are based, in part, on statements from a bevy of confidential witnesses, many of whom confirm that the individual defendants received regular reports and updates on [the oil and gas discovery] Alpine High, making the individual defendants fully aware of the play’s limitations,” the report said. “Despite this alleged knowledge, the individual defendants … made repeated statements promoting Alpine High’s performance and profitability.”

Taking into account all the plaintiffs’ scienter allegations, “the inference that defendants acted recklessly is at least as compelling as any alternative inference,” the judge added.

Apache had also argued in its dismissal motion that the consolidated complaint, filed last December by lead plaintiffs Plymouth County Retirement Association and the Trustees of the Teamsters Union No. 142 Pension Fund, did not contain any well-pled allegations of misrepresentations or omissions.

Judge Edison disagreed and said that while there is no dispute that the defendants made many optimistic statements during the proposed class period, the complaint “provides a detailed discussion of the alleged misrepresentations at issue and explains the reasons why defendants allegedly knew at the time they spoke publicly that those statements were materially false.”

The Private Securities Reform Litigation Act’s safe harbor provision also does not protect the defendants’ alleged misstatements, the judge said.

The defendants are “overreaching,” he said, because “even a cursory review” of the alleged misstatements shows that many are statements of fact, which are not protected by the safe harbor provision.

Additionally, the alleged misstatements were not accompanied by sufficient cautionary language at the time they were made, Judge Edison said.

According to the report, the cautionary language included “generic” terms such as “risks” and “uncertainties” but failed to provide “substantive, company-specific warnings based on a realistic description of the risks applicable to the particular circumstances, as the Fifth Circuit requires.”

Judge Edison added: “As for the more specific warnings that defendants point to, like warning of ‘the risk that Apache will not encounter commercially productive oil and gas reservoirs,’ these warnings are insufficient because ‘[w]hen risks have already begun to materialize, it is no longer sufficient to generally warn of the possibility of these risks in the future.'”

He also rejected Apache’s argument that a “vast majority” of the alleged misstatements qualify as nonactionable opinions and noted that some opinions can be actionable under federal securities laws since “the disclosure required by the securities laws is measured not by literal truth, but by the ability of the statements to accurately inform rather than mislead prospective buyers.”

In Apache’s case, their alleged misstatements are actionable under the 2015 U.S. Supreme Court ruling in Omnicare Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund , because Apache concealed material facts, including that the underlying data did not support any of the “sky-high” estimates Apache senior management was offering, Judge Edison said.

Apache was sued in February 2021 by investors seeking to hold it liable for losses they experienced when the company’s stock dropped by over 83% when it was revealed the Alpine High project was a bust.

Alpine High was touted by Apache as a newly discovered oil and gas play in west Texas, but the company later abandoned the project in February 2020 through a $3 billion write-down.

According to the complaint, the stock drop, which came over the course of nearly a year, was the result of several years of false hope perpetuated by enthusiastic statements from Apache executives based on “unrealistic assumptions” about the amount of available oil and gas in the proposed drilling area.

When it became clear to Apache that the project would fail, the executive leading the project jumped ship altogether, the suit says.

Representatives for the parties did not immediately respond to requests for comment on Wednesday.

The plaintiffs are represented by Thomas R. Ajamie and John S. “Jack” Edwards Jr. of Ajamie LLP, Gregory M. Castaldo, Johnston de F. Whitman Jr., Joshua E. D’Ancona, Michelle M. Newcomer and Daniel B. Rotko of Kessler Topaz Meltzer & Check LLP, and David R. Kaplan, Wolfram T. Worms, Hani Farah, Steven B. Singer, Joshua H. Saltzman, Maya Saxena, Joseph E. White III and Lester R. Hooker of Saxena White PA.

Apache and the other defendants are represented by David D. Sterling, Amy Pharr Hefley, Anthony J. Lucisano and C. Frank Mace of Baker Botts LLP.

The case is In re: Apache Corp. Securities Litigation, case number 4:21-cv-00575, in the U.S. District Court for the Southern District of Texas.

By Katryna Perera

–Editing by Orlando Lorenzo.