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From Securities Regulation Daily, January 20, 2016

Class action claims against Cobalt Energy to continue full steam ahead

By Kevin Kulling, J.D.

A federal court in Texas has denied a motion to dismiss a class action brought against Cobalt International Energy, Inc. and certain of its officers and directors who allegedly violated the securities laws by failing to disclose that the company was being investigated for violating the Foreign Corrupt Practices Act. Class action shareholders alleged that investors lost billions of dollars because Cobalt misrepresented and failed to disclose the corrupted nature of its oil business in Angola as well as the true value of the company’s Angolan oil wells (In re Cobalt International Energy, Inc. Securities Litigation, January 19, 2016, Atlas, N.).

Cobalt’s activity in Angola. Cobalt is an exploration and production company that conducted an initial public offering in December 2009. Prior to the offering, Cobalt entered into an agreement with the Angolan national oil company to acquire a 40 percent interest in oil exploration blocks offshore. On January 4, 2011, Cobalt filed a registration statement and prospectus with the SEC and conducted a stock offering in February 2012 and a bond offering in December 2012. In March 2011, however, Cobalt had learned that the SEC was conducting an informal inquiry into allegations that there existed a connection between the state oil company and senior Angolan government officials while both the SEC and the Department of Justice began formal investigations into whether Cobalt violated the FCPA.

The complaint alleges that Cobalt obtained access to its Angolan wells “through apparent bribery and by partnering with shell companies in Angola that were partially owned by high-level Angolan officials.” In addition, the complaint alleges, Cobalt misrepresented the value of its wells in Angola after the company learned that they contained very little or no oil.

Instead of disclosing these problems, the complaint said, Cobalt and five investment firms that controlled the company sold billions of dollars of Cobalt securities to investors by causing Cobalt to issue materially false and misleading offering documents to investors.

Motions to dismiss the complaint were brought by the “underwriter defendants,” consisting of Goldman, Sachs & Co., Morgan Stanley & Co., LLC, Credit Suisse Securities, Citigroup Global Markets, Inc., and JP Morgan Securities, among others. Another group of defendants, the “control defendants,” including Goldman Sachs Group, Inc., Riverstone Holdings LLC, First Reserve, and Kern Partners, Ltd. brought a dismissal motion while Cobalt Energy and its directors, the “Cobalt defendants,” also sought dismissal.

Cobalt defendants’ motion. The Cobalt defendants sought to have the 10(b) claims dismissed for failure to allege the existence of a false or misleading statement. The court, however, said that the class plaintiffs adequately alleged with particularity the Cobalt defendants, through corporate filings and statements during investor conference calls, misrepresented their knowledge that Angolan government officials owned subsidiary corporations that controlled the wells.

Material misrepresentation. In addition, the court said that the complaint adequately alleged that the Cobalt defendants made material misrepresentations about the oil producing capability of the wells, including that the wells were “a significant discovery.”

The court said that the defendants could not rely on the PSLRA’s safe harbor provisions to characterize the statements as “forward looking” because to the extent the defendants knew the statements were misleading precludes application of safe harbor. The court also found that the statements did not include meaningful cautionary language, a safe harbor requirement.

Scienter. The court also found that the complaint adequately alleged that the Cobalt defendants acted with scienter. The complaint partly relied on statements from confidential witnesses who were former Cobalt insiders. The insiders said that the company knew fairly early that the wells were not likely to be big producers and that they contained primarily gas.

Loss causation. When Cobalt issued corrective disclosures, admitting that at least one of the wells was a gas producing well, the stock price fell significantly. Based on plaintiff’s allegations in the complaint, the court said that the factfinder could reasonably infer that it is more probable than not that the corrective disclosures caused at least a substantial portion of episodes of price decline.

Underwriter defendants. The underwriter defendants moved to dismiss the complaint based on a failure to allege reliance on the part of some plaintiffs. The court noted that a plaintiff asserting a Section 11 claim must allege reliance on the misrepresentation in the registration statement if the plaintiff acquired the security after the issuer has made generally available to its security holders an earning statement covering a period of at least 12 months beginning after the effective date of the registration statement.

Plaintiffs who purchased Cobalt securities after April 30, 2013 are required to plead reliance on the alleged misrepresentations in issue in support of their claims, the court held. Having failed to do so, the court said, the claims of those plaintiffs were dismissed. The court, however, will permit those plaintiffs to file a second amended consolidated class action complaint.

Control defendants. Whether a defendant is a control person is an intensely factual question and the plaintiffs allege that Goldman Sachs and others together controlled Cobalt based on their significant stock ownership and ability to elect a majority of Cobalt’s board of directors. A stockholder agreement gave them the right to select a majority of the members of every board committee, except the audit committee. The court said that although the allegations in the complaint regarding control liability were limited, the allegations were sufficient to satisfy the notice pleadings requirements.

Plaintiffs were given until February 5, 2016, to file a second amended class action complaint.

The case is No. 14-cv-3428.

Attorneys: St. Lucie County Fire District Firefighters' Pension Trust Fund, pro se. Gerald T. Drought (Martin & Drought, P.C.) for Fire and Police Retiree Health Care Fund, San Antonio. Matthew Christopher Matheny (Provost Umphrey Law Firm L.L.P.) for KBC Asset Management NV. Daniel David (Baker Botts) for Joseph H. Bryant. Adam D. Gold (Wachtell, Lipton, Rosen & Katz) for Goldman Sachs Group, Inc. and Riverstone Holdings LLC.

Companies: St. Lucie County Fire District Firefighters' Pension Trust Fund; Fire and Police Retiree Health Care Fund, San Antonio; KBC Asset Management NV; Goldman Sachs Group, Inc.; Riverstone Holdings LLC

MainStory: TopStory DirectorsOfficers FraudManipulation TexasNews

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