Camelot Event Driven Fund v. Alta Mesa Res., Inc.
| Decision Date | 14 April 2021 |
| Docket Number | CIVIL ACTION NO. 4:19-CV-957 |
| Parties | CAMELOT EVENT DRIVEN FUND, A SERIES OF FRANK FUNDS TRUST, et al, Plaintiffs, v. ALTA MESA RESOURCES, INC.; fka SILVER RUN ACQUISITION CORPORATION II, et al, Defendants. |
| Court | U.S. District Court — Southern District of Texas |
This is a consolidated securities class action arising out of the financial collapse of Alta Mesa Resources, Inc. ("Alta Mesa"), which culminated in not only this lawsuit but a bankruptcy proceeding and an ongoing investigation by the Securities and Exchange Commission ("SEC"). The plaintiffs are: FNY Partners Fund LP; FNY Managed Accounts, LLC; Paul J. Burbach; Plumbers and Pipefitters National Pension Fund; and Camelot Event Driven Fund, a series of Frank Funds Trust (collectively "Plaintiffs"). Plaintiffs have filed a consolidated class action complaint alleging claims under Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934.
Alta Mesa was a company that was created by a "blank check" merger, also known as a "special purpose acquisition company" merger or a "SPAC" merger. Plaintiffs allege that the defendants "made materially false and misleading statements and omissions prior to and following" the merger regarding the value and financial health of the acquired companies and of Alta Mesa. (Dkt. 69 at pp. 6-8). Plaintiffs bring claims under Sections 14(a) and 20(a) on behalf of themselves and other Alta Mesa shareholders who were entitled to vote on the merger. (Dkt. 69 at p. 5). Plaintiffs bring claims under Sections 10(b) and 20(a) on behalf of themselves and other Alta Mesa shareholders who acquired Alta Mesa securities during the period from August 16, 2017 to May 17, 2019, inclusive. (Dkt. 69 at p. 5).
Plaintiffs have sued eighteen defendants. Twelve of those defendants were Alta Mesa executives or board members, and two of the defendants were executives at the special purpose acquisition company that became Alta Mesa; the remaining four defendants are related "control entities." (Dkt. 69 at pp. 16-20). The defendants have, between them, filed eight motions to dismiss Plaintiffs' live complaint under Federal Rule of Civil Procedure 12(b)(6). The motions (Dkts. 116, 119, 120, 125, 126, 127, 128, 129) are DENIED.
The pertinent factual allegations, drawn from Plaintiffs' live complaint and taken as true for the purposes of these motions, are as follows. Alta Mesa began as a special purpose acquisition company called Silver Run Acquisition Corporation II ("Silver Run"). (Dkt. 69 at p. 20). A special purpose acquisition company is essentially a shell company that exists solely to raise funds through an initial public offering ("IPO") that are then used to acquire another company. (Dkt. 69 at p. 21). See, e.g., In re Heckmann Corp. Sec. Litig., 869 F. Supp. 2d 519, 527 (D. Del. 2012); In re Stillwater Capital Partners Inc. Litig., 858 F. Supp. 2d 277, 280, 288 (S.D.N.Y. 2012). The target companycannot be identified before the special purpose acquisition company completes its IPO. (Dkt. 69 at pp. 21-22). At least 90% of the capital raised in the IPO must be deposited into a trust account, with the interest paid to the investors. (Dkt. 69 at p. 22). The special purpose acquisition company's management team must identify and acquire a target company within a specified time period, typically between 18 and 24 months. (Dkt. 69 at p. 22). Under NASDAQ rules, the target company must have a fair market value equal to 80% of the balance in the special purpose acquisition company's trust account. (Dkt. 69 at p. 22). If the special purpose acquisition company's management team fails to acquire a target company within the specified time period, then the special purpose acquisition company is dissolved and the IPO proceeds are returned to the investors. (Dkt. 69 at pp. 22-23). "No salaries, finder's fees or other cash compensation are paid to the founders and/or management team if they fail to consummate a successful business combination." (Dkt. 69 at p. 23).1
The general terms summarized above applied to Silver Run's IPO, which was completed in March of 2017 and sponsored by Defendant Riverstone Holdings LLC ("Riverstone"), "a private equity firm focused on the energy sector[.]" (Dkt. 69 at pp. 19, 24-27). Silver Run sold 103.5 million shares of common units to investors at $10 a share for gross proceeds of $1.035 billion. (Dkt. 69 at p. 25). Under the terms of the IPOprospectus, Silver Run had two years to identify and acquire a target business or target businesses having an aggregate fair market value of at least 80% of the IPO proceeds held in trust. (Dkt. 69 at p. 27). The "IPO offering materials stated that [Silver Run] planned to pursue an acquisition that would capitalize on Riverstone's expertise in the energy industry by leveraging its industry experience and insider knowledge to acquire 'fundamentally sound' assets that were underpriced and offered attractive investment returns." (Dkt. 69 at p. 26).
Silver Run's management team decided to target two oil-and-gas companies, an upstream company called Alta Mesa Holdings, LP ("AMH") and a midstream company called Kingfisher Midstream LLC ("Kingfisher"). (Dkt. 69 at p. 27). AMH "focused on the development and acquisition of unconventional oil and natural gas reserves" in Oklahoma's STACK2 shale play. (Dkt. 69 at pp. 27-28). Kingfisher "focused on providing crude oil gathering, gas gathering, and processing and marketing to producers of natural gas, natural gas liquids, . . . crude oil and condensate in the STACK play." (Dkt. 69 at p. 29). The two companies, though nominally separate, were deeply intertwined. "Kingfisher had overlapping owners with AMH . . . , [and] AMH and Kingfisher were interconnected from an operational perspective." (Dkt. 69 at p. 30). In 2016, the year before Silver Run's IPO, "nearly 97% of Kingfisher's revenues werederived from wells operated by AMH[.]" (Dkt. 69 at p. 30).3 Silver Run's management saw the "synergistic" relationship between AMH and Kingfisher as an asset; they emphasized in "a press release on SEC Form 8-K" that they had chosen to target AMH and Kingfisher in part because the two companies provided "a perfect strategic match for [Silver Run's] desired integrated platform" and an opportunity to create a "pure-play STACK upstream and midstream company" that would be "the first of its kind in the public markets[.]" (Dkt. 69 at p. 60); see also Silver Run Form 8-K dated August 16, 2017.4 Silver Run's management further stated that AMH's "core acreage position . . . ha[d] among the lowest breakevens5 in the U.S. at around $25 per barrel" and that Kingfisher had acreage dedication contracts with "five . . . third party customers" apart from AMH. See Silver Run Form 8-K dated August 16, 2017. Silver Run's management saw big things for Kingfisher: on account of Kingfisher's "significant additional third party growth potential[,]" Silver Run's management intended to "spin off" Kingfisher in "a potential future midstream IPO." (Dkt. 69 at p. 40); see also Silver Run Form 8-K dated August 16, 2017.
On August 16, 2017, Silver Run announced that it had entered into a preliminary agreement to merge with AMH and Kingfisher. (Dkt. 69 at p. 31). The proposed transaction, valued at $3.8 billion, was subject to approval by Silver Run's shareholders. (Dkt. 69 at p. 31). Silver Run shareholders who did not want to retain a continuing interest in the business after the merger had the right to redeem their shares at the time of the merger. (Dkt. 69 at p. 27).
Silver Run issued a Definitive Merger Proxy Statement to its shareholders on January 19, 2018 ("the Proxy"). (Dkt. 69 at p. 33). In the Proxy, Alta Mesa's board of directors recommended that Silver Run's shareholders approve the merger with AMH and Kingfisher. (Dkt. 69 at p. 33). The Proxy "stated that AMH and Kingfisher were poised for accelerating growth immediately following the [merger.]" (Dkt. 69 at p. 35). Like the August 16, 2017 8-K filing, the Proxy emphasized the "low break-even commodity prices" of AMH's acreage and further indicated that Kingfisher had "long-term acreage dedication contracts from multiple active producers" and "firm takeaway contracts on key pipelines" and "was well-positioned to benefit from increasing upstream development activity in an active and prolific basin with upside potential from further expansion projects." (Dkt. 69 at pp. 33-35). The Proxy "indicated that AMH had achieved an estimated 2017 average net daily production of 20.8 thousand barrels of oil equivalent per day ("MBOE/d"), and was expected to increase its 2018 average net daily production to 38.5 MBOE/d and its 2019 average net daily production to 68.9 MBOE/d." (Dkt. 69 at p. 35). The Proxy also "stated that AMH had achieved 2017 adjustedEBITDAX6 . . . of $155 million, and was expected to increase its 2018 adjusted EBITDAX to $358 million and its 2019 adjusted EBITDAX to $701 million." (Dkt. 69 at p. 35). As for Kingfisher, "the Proxy stated that Kingfisher was estimated to have achieved $42 million in 2017 EBITDA, and was expected to increase its 2018 EBITDA to $185 million and its 2019 EBITDA to $318 million." (Dkt. 69 at p. 35)
The Proxy "represented to investors that the estimates and projections contained therein were based on observable trends and capabilities, as well as economically justified assumptions regarding the expected cash flows of AMH and Kingfisher." (Dkt. 69 at p. 36). "In addition, the Proxy included extensive statements regarding the quality of AMH's internal controls over oil and gas reserve estimates[,]" among them a statement that:
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