On April 21, 2017, the United States Court of Appeals for the Fifth Circuit affirmed the dismissal of a shareholder class action lawsuit against certain officers and directors of ATP Oil & Gas Corporation (“ATP”). Neiman et al. v. Buhlman et al., Case No. 15-31094 (5th Cir. Apr. 21, 2017). Plaintiffs, who alleged that defendants misrepresented the production of a new oil well, the liquidity of the company, and the reason that the former CEO had resigned, brought claims under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5, as well as control-person claims under Section 20(a) of the Exchange Act. The Fifth Circuit affirmed the Louisiana district court’s dismissal of plaintiffs’ Second Amended Complaint, holding that plaintiffs had failed to adequately plead scienter in support of each of their claims.

ATP, a Texas developer of oil and gas properties, had an interest in 104 wells in the Gulf of Mexico as of March 2010. In August 2011, ATP began production from Well #4, and the CFO stated that it delivered on “original expectations,” producing 7,000 barrels of oil equivalent per day. Plaintiffs alleged that this statement was misleading because, in November 2011, ATP disclosed that Well #4 was producing only 3,500 barrels of oil equivalent per day. In late September 2011, after Moody’s Investors Service issued a report stating that ATP’s cash flow was “not sufficient to cover” its outstanding notes, ATP’s CFO stated in response that “[o]ur expectation is that everything is going to be fine,” and ATP also represented, more generally, that from 2010 to 2012 the company’s financial condition was “solid.” Plaintiffs alleged that these statements were misleading and that ATP’s financial condition actually was worsening. Plaintiffs also alleged that, contrary to a June 7, 2012 company press release stating that ATP had been “unable to reach a mutually agreeable employment agreement” with the former CEO, Matt McCarroll—who had resigned six days after his hiring was announced— McCarroll actually resigned because the Board refused to adopt his recommendation to immediately restructure ATP once he became aware of its financial weakness.

The Fifth Circuit held that plaintiffs’ allegations were insufficient to establish scienter in connection with any of these alleged misstatements. The Court noted that while the CFO may have, according to plaintiffs, overestimated the production from Well #4, plaintiffs had not sufficiently pled facts establishing any motive for him to lie, as the company revised its production estimate shortly thereafter. Similarly, the Court held that “[t]he desire to raise capital in the normal course of business does not support a strong inference of scienter because virtually all corporate insiders share this goal.” The Court also gave little weight to the Confidential Witness allegations cited by plaintiffs, noting that these, even if taken as true, merely showed that reports on Well #4’s production were made available to the CFO, not that he actually read them or was otherwise made aware of the lower production. With respect to the statements concerning ATP’s financial condition, the Court held that ATP’s continuous disclosure of its worsening cash flow, as well as the prospective nature of its business, weighed against a finding of scienter. Finally, the Court held that nothing in the amended complaint indicated that McCarroll informed anyone at ATP of his reason for resigning, emphasizing that he neither conditioned his employment on the Board agreeing to restructure the company nor did he tell ATP that he “resigned because of the company’s financial condition.” Having found that plaintiffs failed to adequately plead scienter, the Court affirmed the dismissal of all claims.

In short, the Fifth Circuit carefully reviewed each allegation to determine whether plaintiffs had sufficiently pled scienter under the PSLRA’s heightened pleading requirements, and determined they did not. The Fifth Circuit relied on its prior decisions which stated that although it must view facts at the motion to dismiss stage in favor of the plaintiffs, courts should “not strain to find inferences favorable to the plaintiffs.”

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