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From Securities Regulation Daily, December 5, 2014

Shareholders turn blue over Cobalt's potential FCPA violations

By John M. Jascob, J.D.

Two police and firefighters’ pension funds have filed a class action complaint against Cobalt International Energy, Inc. (Cobalt) and certain of its officers and directors, alleging that the defendants violated the federal securities laws by failing to disclose that the company violated the Foreign Corrupt Practices Act (FCPA) to gain access to oil wells in the Republic of Angola. The complaint, which was filed in the Southern District of Texas, also alleges that Cobalt and its underwriters misrepresented the value of the Angola wells after learning that they contained little or no oil, causing Cobalt's stock to be artificially inflated during the class period (St. Lucie County Fire District Firefighters’ Pension Trust Fund v. Bryant, November 30, 2014).

Bribery and shell companies. Specifically, 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 government officials. In February 2010, Cobalt gained access to certain oil exploration “blocks” in offshore Angola under an agreement with the Angolan government.  As part of that agreement, Cobalt partnered with the national oil company of Angola and two Angolan corporations, Nazaki Oil and Gáz, S.A.  The complaint alleges that Cobalt had improper business relationships with Angolan government officials that gave the officials pecuniary interests in Nazaki, and, by extension, in Cobalt’s business operations. This activity, the complaint alleges, has placed the company at serious risk of enforcement actions by the SEC and the Department of Justice for violations of the FCPA and federal securities laws.

Gas, not oil. In addition, the shareholders allege, Cobalt misrepresented the value of its Angolan wells after learning that they contained a large amount of natural gas but very little or no oil. According to the complaint, the relative amounts of oil and natural gas in the wells was a critical factor for Cobalt’s investors because a high composition of natural gas would render them virtually worthless because Cobalt had no rights to gas discoveries under its agreements with Angola.  The complaint claims that Cobalt and its executives nevertheless misrepresented the company as having several “large, oil-focused high impact wells” in Angola. Cobalt also allegedly misrepresented the amount of oil in its Lontra well as “[g]reater than billion barrel potential,” not a “big gas field,” and “a significant discovery.”

Misleading offering documents. Instead of disclosing these problems, the shareholders allege that Cobalt and the five investment firms that constituted the company’s largest shareholders collectively sold $3.3 billion of Cobalt’s securities at very high class period prices by causing Cobalt to issue materially false and misleading offering documents to investors. The company also raised over $2.5 billion from investors through a convertible bond offering.

On August 5, 2014, however, Cobalt’s share price fell 11 percent when the company disclosed that, despite repeated claims during the class period that it was in full compliance with anti-bribery laws, the SEC’s Enforcement Division had recommended an enforcement action against the company for violations of certain federal securities laws related to Cobalt’s operations in Angola and possible Angolan government official ownership of Nazaki Oil and Gas. On November 4, 2014, the last day of the class period, Cobalt’s stock price dropped another 11 percent when the company disclosed a net loss of $143 million that allegedly reflected the serious financial impact that the poor quality of Cobalt’s Angolan wells was having on the company.

Relief sought. The complaint seeks damages on behalf of purchasers of Cobalt’s securities between February 21, 2012, and November 4, 2014. Among other things, the complaint alleges that Cobalt and the executive defendants violated Exchange Act Section 10(b) and Rule 10b-5, and that Cobalt, the director defendants, and the underwriter defendants violated Securities Act Section 11.

The case is No. 14-3428.

Attorneys: Gerald T. Drought (Martin & Drought, P.C.) for Fire and Police Retiree Health Care Fund, San Antonio. Gerald H. Silk (Bernstein Litowitz Berger & Grossmann LLP) for Fire and Police Retiree Health Care Fund, San Antonio and St. Lucie County Fire District Firefighters’ Pension Trust Fund.

Companies: St. Lucie County Fire District Firefighters' Pension Trust Fund; Fire and Police Retiree Health Care Fund, San Antonio; Cobalt International Energy Inc.; Goldman Sachs Group, Inc.; Riverstone Holdings LLC; The Carlyle Group; First Reserve Corp.; KERN Partners Ltd.; Goldman Sachs & Co.; Morgan Stanley & Co. LLC; Credit Suisse Securities (USA) LLC; Citigroup Global Markets Inc.; J.P. Morgan Securities LLC; Tudor, Pickering, Holt & Co. Securities, Inc.; Deutsche Bank Securities Inc.; RBC Capital Markets, LLC; UBS Securities LLC; Howard Weil Inc.; Stifel, Nicolaus & Company, Inc.; Capital One Southcoast, Inc.; Lazard Capital Markets LLC

MainStory: TopStory FraudManipulation TexasNews

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