Woodley v. Gulfport Energy Corporation
- Edgardo Ramos
- 1:20-cv-02357
- U.S. District Court · Southern District of New York
- 21
In Woodley v. Gulfport Energy Corporation, Judge Ramos granted dismissal of securities-fraud claims but allowed amendment.
The ruling affected the plaintiffs’ proposed securities-fraud class action against David M. Wood, Keri Crowell, and Quentin R. Hicks; the court dismissed the pleaded claims but allowed the plaintiffs to amend.
What happened
In Woodley v. Gulfport Energy Corporation, investors alleged that Gulfport Energy Corporation’s officers made misleading statements about the company’s accounting for oil and gas properties. The alleged accounting error led Gulfport to restate its financial results and report a much larger impairment.
The defendants asked the court to dismiss the claims under the rule governing complaints that do not adequately state a legal claim. The court held that the complaint did not allege enough particular facts to strongly suggest that the defendants acted with fraudulent intent. It also held that the related claims against controlling individuals could not proceed because the primary securities-fraud claim was inadequately pleaded.
Judge Ramos granted the motion to dismiss both the securities-fraud claims and the controlling-person claims. The court allowed the plaintiffs to file a third amended complaint by February 11, 2022.
The detailed version
- Woodley v. Gulfport Energy Corporation · No. 1:20-cv-02357
- Edgardo Ramos
- Jan. 11, 2022
Background
Robert F. Woodley brought a proposed class action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The complaint alleged that Gulfport Energy Corporation and its senior officers—David M. Wood, Keri Crowell, and Quentin R. Hicks—made materially false or misleading statements and omissions concerning Gulfport’s accounting for oil and gas properties.
Gulfport used the full-cost accounting method. The complaint alleged that Gulfport improperly transferred certain unevaluated leasehold costs into its amortization base, causing it to conduct an improper quarterly ceiling test. Gulfport later restated its third-quarter 2019 results, increasing its reported impairment from $35.6 million to $571.4 million and changing its reported third-quarter net loss from $48.8 million to $484.8 million. The opinion states that the case was stayed as to Gulfport because of its Chapter 11 bankruptcy proceedings.
Motion and Legal Standards
The defendants moved to dismiss the second amended complaint under Federal Rule of Civil Procedure 12(b)(6), which addresses failure to state a legally sufficient claim. Securities-fraud claims also must meet heightened pleading requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. Those rules require a plaintiff to identify the allegedly misleading statements, who made them, when and where they were made, why they were misleading, and particular facts supporting a strong inference of fraudulent intent, known as scienter.
Section 10(b) and Rule 10b-5
The court focused on scienter, the required wrongful state of mind. The plaintiffs argued that the defendants had a motive to conceal the accounting weakness because shareholders threatened a proxy contest and the defendants’ positions were at risk. The court found those allegations insufficient because pressure to improve a company’s financial results and stock price is generally shared by corporate officers and did not show a sufficiently concrete and personal benefit.
The plaintiffs also relied on alleged access to Gulfport’s general ledger and ceiling-test information, the decline in the natural gas market, the internal-control weakness, allegedly inaccurate Sarbanes-Oxley certifications, the accounting violations, the size of the restatement, an earlier Securities and Exchange Commission matter involving Crowell, and the timing of Crowell’s resignation. The court considered these allegations individually and collectively but found that they did not strongly suggest conscious misbehavior or recklessness. In particular, the court said that senior positions and general access to company information were not enough; the complaint did not specifically identify information showing that the defendants knew their public statements were false. The court also concluded that the accounting error, internal-control weakness, certifications, restatement size, earlier regulatory matter, and resignation did not supply the required inference of fraudulent intent.
The court found the inference that Gulfport discovered, disclosed, and corrected accounting errors without fraudulent intent more compelling than the plaintiffs’ proposed inference. It therefore granted the defendants’ motion to dismiss the claims under Section 10(b) and Rule 10b-5.
Section 20(a)
Section 20(a) creates derivative liability for individuals who control a person or entity that violates Section 10(b). Because the plaintiffs inadequately pleaded a Section 10(b) violation, the court granted the motion to dismiss the Section 20(a) claim as well.
Leave to Amend and Disposition
The plaintiffs requested permission to amend if the motion was granted. The court permitted them to replead the dismissed claims because this was the court’s first opportunity to identify the specific pleading defects and it was not yet apparent that another amendment would be futile. The court granted the defendants’ motion to dismiss and allowed the plaintiffs to file a third amended complaint, if at all, by February 11, 2022.
Read the full 21-page opinion on CourtListener, the free public archive maintained by the Free Law Project.