Gernandt v. Sandridge Energy Inc.

• Decision Date: 28 July 2017
• Docket Number: Case No. CIV-15-834-D,C/w Case No. CIV-15-1001-D,C/w Case No. CIV-15-892-D
• Parties: BARTON GERNANDT, JR., et al., Plaintiff, v. SANDRIDGE ENERGY INC., et al., Defendants. CHRISTINA A. CUMMINGS, et al., Plaintiff, v. SANDRIDGE ENERGY, INC., et al., Defendants. RICHARD A. McWILLIAMS, et al., Plaintiff, v. SANDRIDGE ENERGY, INC., et al., Defendants.
• Court: U.S. District Court — Western District of Oklahoma

BARTON GERNANDT, JR., et al., Plaintiff, v. SANDRIDGE ENERGY INC., et al., Defendants.

CHRISTINA A. CUMMINGS, et al., Plaintiff, v. SANDRIDGE ENERGY, INC., et al., Defendants.

RICHARD A. McWILLIAMS, et al., Plaintiff, v. SANDRIDGE ENERGY, INC., et al., Defendants.

Case No. CIV-15-834-D

C/w Case No. CIV-15-892-D

C/w Case No. CIV-15-1001-D

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF OKLAHOMA

July 28, 2017

ORDER

INTRODUCTION

This consolidated class action involves claims for alleged violations of the Employee Retirement Income Security Act of 1974, codified at 29 U.S.C. § 1001, et seq. ("ERISA"), with respect to the SandRidge Energy, Inc., 401(k) Plan (the "Plan"). Plaintiffs, participants and beneficiaries of the Plan, claim the defendants were responsible for the Plan's investments and breached their fiduciary duties by, inter alia, retaining SandRidge common stock as an investment option in the Plan despite its decline and when a reasonable fiduciary would have done otherwise. See Consol. Class Action Compl., ¶ 2 (hereinafter "Compl."). Specifically, Plaintiffs allege Defendants permitted the Plan to continue to offer SandRidge Stock as an investment option to Participants even after the Defendants knew or should have known that: (1) SandRidge Stock was, for a substantial portion of the Class Period (August 2, 2012 to the present), artificially inflated; (2) SandRidge was in extremely poor financial condition; and (3) SandRidge faced extremely poor long term prospects, making it an imprudent retirement investment option for the Plan. See id. ¶ 3. Plaintiffs' Complaint is largely based on public information about SandRidge's gradual decline into bankruptcy, beginning in 2012 and culminating in 2016.

Before the Court is Defendant Reliance Trust Company's (Reliance) Motion to Dismiss Consolidated Class Action Complaint and Motion to Strike Jury Demand [Doc. No. 118]. Reliance was the Plan's trustee and held the Plan's assets in trust.Compl. ¶ 73. As stated more fully below, Plaintiffs contend that, given the amount of public information available regarding SandRidge's financial condition, Reliance had a duty to disregard any instruction to invest Plan assets in SandRidge stock. Id. ¶ 75. Plaintiffs have responded to the Motion [Doc. No. 125] and Reliance has replied [Doc. No. 130]. The matter is fully briefed and at issue.¹

BACKGROUND

The following facts are taken from the Consolidated Complaint and, in addition to all reasonable inferences, viewed in the light most favorable to Plaintiffs. Wasatch Equality v. Alta Ski Lifts Co., 820 F.3d 381, 386 (10th Cir. 2016). Legal conclusions, however, are not or accepted as true. See id. (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).

The SandRidge Energy, Inc., 401(k) Plan was formed to provide participants with the opportunity to save for retirement. A trust was established as a funding medium for the Plan, which designated Reliance as trustee. Reliance was not a party to the Plan and had no duties or responsibilities with respect to it other than those expressly included in the applicable trust agreements. Under the agreements,Reliance had a duty to invest and reinvest trust assets pursuant to instructions from certain fiduciaries. A significant portion of the Plan assets consisted of SandRidge stock -- approximately 34% and 36% of the Plan's net assets in 2012 and 2013. A Form 11-K that SandRidge filed with the Securities and Exchange Commission (SEC) noted that as a result of this concentration, "any significant fluctuation in the market value of Company common stock could impact the net assets of the Plan as well as individual participant account balances." From 2011 to 2014, the Plan offered numerous investment options, including SandRidge stock. During this period, certain investment options were placed on a "watch list" and removed due to, among other things, underperformance. During the relevant time period, SandRidge stock was never placed on the watch list.

SandRidge explored, developed and produced natural gas with a focus on the Mid-Continent region of North America, also known as the "Mississippian formation" or "Mississippian play." SandRidge stated it was investing in the Mississippian play due to the large amounts of oil relative to natural gas. However, SandRidge overstated the amount of oil relative to natural gas in the area (which dipped in price), resulting in the overstatement of the economic value of SandRidge's Mississippian play and thereby overvaluing the price of SandRidge stock. From 2011 to 2012, the Complaint alleges SandRidge made statements thatfalsely touted the economic value of its wells in the Mississippian play by, inter alia, omitting the true amount of natural gas relative to oil in SandRidge's wells.

On August 2, 2012, SandRidge announced its financial results for the second quarter 2012 and first six months of 2012 in a press release that was filed with the SEC. The announcement stated that the Mississippian play's daily production grew 31% quarter over quarter and 199% from the comparable period in 2011. However, SandRidge's massive spending on drilling new wells in the Mississippian play enabled SandRidge to report increasing production numbers, although its older wells were experiencing steep declines. The heightened drilling activity masked the rapid decline and depletion in SandRidge's Mississippian wells.

Plaintiffs allege that by this point in time, SandRidge's Board of Directors and Benefits Committee knew or should have known of the company's misstatements, given the investigative resources available. After the close of trading on November 8, 2012, SandRidge issued a press release reporting a "net loss applicable to common stockholders of $184 million." SandRidge's Chief Executive Officer (CEO), Tom Ward, acknowledged that its increase in natural gas production had been offset by a lower amount of oil being produced. In response to this news, an analysist downgraded SandRidge's rating from "Buy" to "Neutral." SandRidge shares subsequently dropped to $5.51 per share on November 9, a 34% decline from January 3, 2012.

SandRidge's Benefits Committee met with a consultant on March 7, 2012 to review investment options for the Plan. The Committee agreed to continue to monitor one Plan investment, but at no time did the board discuss SandRidge stock as an investment. By the beginning of May 2012, SandRidge stock dropped 4.7% to $6.91 per share. On May 7, 2012, SandRidge reported its financial results for the first quarter of 2012, where it reported a net loss of $216 million. The company also reported a loss to its cash and cash equivalents, which dropped 38.5% from $207.7 million to $127.8 million. The Benefits Committee met again on May 9, 2012 to review investment options. The committee agreed to continue monitoring two Plan investment options due to lagging performance. However, the committee did not discuss SandRidge stock. During this time, SandRidge's Z-Score was 0.12,² and its debt-to-equity ratio was 1.93 (meaning it had 1.93 times more debt than equity). Plaintiffs state that, by August 2, 2012, it was or should have been clear that SandRidge stock was not a prudent investment. On August 6, 2012, the BenefitsCommittee met only to discuss SandRidge's health plans. At its next meeting, held August 27, 2012, the committee concluded that offering SandRidge stock as an investment option was required by the Plan and even if it was not required, it was appropriate to keep SandRidge stock as an investment. The committee met again on September 21, 2012 to discuss company health plans.

Citing SandRidge's "disastrous performance," a major investor called for the resignation of SandRidge's CEO. By mid-December 2012, SandRidge stock was downgraded to "Sell" by one investment bank. On December 9, 2012, SandRidge sold its properties in the Permian Basin, which caused its stock to fall 4.8%, and SandRidge shares were down over 20% by year's end. At the end of December, SandRidge's Z-Score was 0.20 and its debt-to-equity ratio was 1.8. On December 11, 2012, the Benefits Committee met and reviewed SandRidge stock, where it, again, concluded that the Plan required offering SandRidge stock as an investment and offering the stock was appropriate even absent such a requirement.

In 2013, SandRidge was downgraded to "Underweight" and "Underperform" by two investment firms. The Benefits Committee met again on March 25, 2013 and reviewed the Plan's investment options. Approximately thirteen Plan investment funds were recognized as "underperforming." Regarding SandRidge stock, however, the Committee noted that stock price fluctuations were an insufficient basis to require removing it as an investment option, but if the committee had knowledge ofan impending collapse, such information would need to be considered. As before, the committee concluded that offering SandRidge stock was required by the Plan and remained an appropriate option even if it was not required. On May 8, 2013, for the first quarter, SandRidge reported a net loss of $531.3 million, $315 million more than in 2012. The Benefits Committee met on May 20, 2013 and reviewed the Plan's investments. Approximately twelve investments were viewed as "underperforming." The Committee concluded that offering SandRidge stock was required by the Plan and remained appropriate as an option even absent a requirement. By the end of the second quarter of 2013, SandRidge reported $506.6 million in losses for the first six months ending June 30, 2013. As of June 30, 2013, SandRidge's Z-Score was 0.26.

The Benefits Committee met again on August 15, 2013. Ten investments were recognized as "underperforming." The committee agreed to keep SandRidge stock as an investment option. On November 6, 2013, SandRidge reported its financial results for the third quarter of 2013, ending September 30, 2013, where it reported $39 million less in total revenues. It also reported a net loss of income...