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From Securities Regulation Daily, June 26, 2013

Part of IPO fraud case goes on; Pinter trumps Rule 159A

By Mark S. Nelson, J.D.

Portions of an IPO fraud case may continue, but key claims must be dismissed, according to the federal court in Dallas. Nursing Homes and Related Industries Pension Plan (NHRI) had sued Kosmos Energy LTD (Kosmos) and its lead underwriters and major shareholders for Securities Act fraud. Certain Section 11 and 12 claims may proceed, but the court dismissed all other related claims, including controlling person claims (In re Kosmos energy LTD, Securities Litigation, June 24, 2013, Boyle, J.).

Background. Kosmos went public in 2011 after having discovered one of the largest oil deposits off the coast of Ghana a few years earlier. According to NHRI’s complaint, Kosmos and its co-lead underwriters, Citigroup Global Markets, Inc., Barclays Capital Inc. and Credit Suisse Securities (USA) LLC, and its major shareholders, The Blackstone Group L.P. (Blackstone) and Warburg Pincus LLC (Warburg) had engaged in fraudulent conduct related to Kosmos’ IPO. Specifically, NHRI had alleged that Kosmos had filed a false and misleading registration statement and that numerous individual and other defendants sold these shares to NHRI.

Section 11 claims. The court noted that Securities Act Section 11 claims require only notice pleading rather than the heightened pleading required under FRCP Rule 9(b) and the PSLRA. Generally, the complaint alleged that Kosmos’ registration statement had misled investors about its production capacity and production forecasts.

Kosmos argued that these claims should be dismissed because nothing in its registration statement would have altered the total mix of information available to investors. The court, however, found many of the plaintiffs’ claims were adequately pleaded. However, the court dismissed claims regarding drillstem rates for Kosmos wells because the chart included in Kosmos’ registration statement was not misleading for its productivity forecast and because it did not mention actual production figures.

Section 12(a)(2) claims. NHRI had alleged that Kosmos should be liable as a Section 12(a)(2) issuer based on its reading of the Supreme Court’s National Cable opinion and Securities Act Rule 159A(a). Kosmos argued that the Supreme Court’s Pinter opinion trumped Rule 159A.

The court observed that Pinter backed the theory that, in a firm commitment underwriting, only one who sells shares directly to a buyer can be liable under Section 12(a)(2). This would implicate the underwriters but not typically the issuing company. The court found that Pinter and Fifth-Circuit precedent barred NHRI’s view of Rule 159A. As a result, Kosmos was not liable under Section 12(a)(2) because it neither directly sold to nor solicited the purchase of its shares from NHRI. The case, however, may proceed regarding the underwriter defendants because they sold Kosmos shares directly to NHRI.

Controlling persons. The individual and shareholder defendants argued that they should be dismissed because there was no alleged primary securities law violation. The court, however, disagreed and instead declined to dismiss this claim to the extent that the complaint had alleged a primary violation.

Blackstone and Warburg had argued that they did not control Kosmos and thus should be dismissed. NHRI, by contrast, alleged that Blackstone and Warburg controlled their own subsidiaries that held Kosmos stock and that these firms controlled Kosmos’ voting power through their appointment of several Kosmos directors. The court said that it would not assume that Blackstone’s and Warburg’s Kosmos directors acted for them. The court noted that these defendants had no daily operational input regarding Kosmos. The court also rejected NHRI’s argument that controlling person liability can attach because Kosmos had elected to be a “controlled entity” under NYSE rules.

The case is No. 3:12-CV-373-B.

Attorneys: Theodore Carl Anderson, III (Kilgore Law Center) for Mathew A. Brady. Joe Kendall (Kendall Law Group LLP) for George M. Mounger and Nursing Homes and Related Industries Pension Plan. William B. Federman (Federman & Sherwood) for John Gosselin and Kosmos Investor Group. Hamilton Philip Lindley (Deans & Lyons, LLP) for William Tarleton. Daniel H. Charest (Susman Godfrey LLP) for Kosmos Energy Ltd., Brian F. Maxted, W. Greg Dunlevy, Sylvia Manor, John R. Kemp and David I. Foley. John C. Wander (Vinson & Elkins) for Warburg Pincus LLC. Bruce D. Angiolillo (Simpson Thacher & Bartlett LLP) for Blackstone Capital Partners. Veronica S. Lewis (Gibson, Dunn & Crutcher LLP) for Citigroup Global Markets, Inc., Barclays Capital, Inc., SG Americas LLC, Credit Agricole Securities, Natixis Securities Americas LLC, Jefferies & Company Inc., RBC Capital Markets LLC, Scotia Capital Inc., BNP Paribas Securities Corp., HSBC Securities Inc. and Credit Suisse Securities. Jim L. Flegle (Loewinsohn Flegle Deary LLP) for Paul Arceneaux.

Companies: Barclays Capital Inc.; The Blackstone Group L.P.; Citigroup Global Markets, Inc.; Credit Suisse Securities (USA) LLC; Kosmos Energy LTD; Nursing Homes and Related Industries Pension Plan; Warburg Pincus LLC

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