In re Plains All Am. Pipeline, L.P. Sec. Litig.

• Decision Date: 30 March 2018
• Docket Number: Lead Case No H:15–02404
• Citation: 307 F.Supp.3d 583
• Parties: IN RE PLAINS ALL AMERICAN PIPELINE, L.P. SECURITIES LITIGATION
• Court: U.S. District Court — Southern District of Texas

307 F.Supp.3d 583

IN RE PLAINS ALL AMERICAN PIPELINE, L.P. SECURITIES LITIGATION

Lead Case No H:15–02404

United States District Court, S.D. Texas, Houston Division.

Signed March 30, 2018

Entered April 2, 2018

MEMORANDUM AND OPINION

Lee H. Rosenthal, Chief United States District Judge

I. Background

This Memorandum and Opinion addresses the defendants' second motion to dismiss this securities-fraud amended complaint. The complaint arises from a highly publicized oil spill in an environmentally sensitive area on the California coast. The defendants responded, according to the plaintiffs, with a series of misrepresentations about the extent of the spill and the financial impact on Plains, the oil and gas pipeline owner and operator. The plaintiffs contend that Plains falsely claimed to have a comprehensive, effective environmental and regulatory compliance program to prevent oil spills and, if they occurred, to quickly remediate the effects. When the facts emerged, the stock price dropped. A putative class of stockholders sued the company, its officers and directors, and the banks that underwrote some of its securities offerings, seeking compensation for their stock-price losses.

On March 29, 2017, the court issued a lengthy Memorandum and Opinion addressing the defendants' first motions to dismiss. The court dismissed the plaintiffs' claims, without prejudice and with leave to amend. (Docket Entry No. 136).¹ The specific rulings were as follows:

• The Exchange Act claims were dismissed, without prejudice and with leave to amend, because: (1) the majority of the statements, as pleaded, were not actionably misleading, and (2) the plaintiffs did not allege facts that gave rise to a strong inference of scienter for any defendant for any statement. Op. at 32–33;

• Some of the Exchange Act claims were found potentially actionable, but not as pleaded, including two legal-compliance statements in Plains's agreements with the Underwriter defendants:

(1) "None of the Issuers, the GP Entities or the Material Subsidiaries is in violation of any law, statute, ordinance, administrative or governmental rule or regulation applicable to it or of any decree of any court or governmental agency or body having jurisdiction over it...."; and

(2) "Environmental Compliance. Except as described in the Pricing Disclosure Package and the Prospectus, none of the Plains Entities, directly or indirectly, has violated any environmental, safety, health or similar law or regulation applicable to its business relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), or lacks any permits, licenses or other approvals required of them under applicable Environmental Laws to own, lease or operate their properties and conduct their business as described in the Pricing Disclosure Package and the Prospectus or is violating any terms and conditions of any such permit, license or approval, which in each case would reasonably be expected to have a Material Adverse Effect." Op. at 61.

• A statement about corrosion control on the Plains website and three post-spill statements by Plains's safety and security director, Patrick Hodgins, were actionably misleading, as pleaded, including:

(1) a statement on Plains's website that it "perform[s] scheduled maintenance on all of our pipeline systems and make[s] repairs and replacements when necessary or appropriate," Op. at 41;

(2) Hodgins's statement that "[t]he first time I heard anything about the corrosion is what I read in the newspapers.... We had no indication at all to assume there was an issue," Op. at 74–75;

(3) Hodgins's statement, when asked whether the 2007 or 2012 in-line inspection runs had uncovered any sections of line 901 with metal loss greater than 50 percent, that Plains "had not had any indication at that time," id. ; and

(4) Hodgins's failure to correct a spill-estimate figure, when asked about a 105,000 gallon spill volume, despite Plains's alleged knowledge that the spill volume could be much larger. Id.

• The four statements that were actionably misleading as pleaded—Hodgins's three statements and the statement about corrosion control on Plains's website—were not set out with an alleged basis for a strong inference of scienter. Op. at 76–77.

• The plaintiffs' "general" allegations of scienter as to the statements held to be false or misleading were insufficient. Op. at 77–88.

• The defendants' loss-causation arguments were not a sufficient basis to dismiss the case. Op. at 89.

• The court rejected the plaintiffs' "class standing" argument; held that the plaintiffs who did not purchase notes in or traceable to the August 2013, September 2014, or the two December 2014 notes offerings did not have standing; and dismissed the plaintiffs' claims under § 11 and § 12(a)(2) of the Securities Act for those offerings, for lack of subject-matter jurisdiction. Op. at 97.

The court dismissed the plaintiffs' Exchange Act and Securities Act claims, without prejudice and with leave to amend. Op. at 98. The plaintiffs filed a Second Amended Consolidated Complaint. (Docket Entry No. 137). The Plains defendants and the Underwriter defendants have moved to dismiss this amended pleading. (Docket Entries No. 140, 141). The plaintiffs responded, and both groups of defendants separately replied. (Docket Entry Nos. 142, 143, 144). The court held a hearing at which it heard arguments on the motions.

The primary new factual allegations in the Second Amended Complaint are:

• some of Plains's statements apply "specifically—and exclusively" to its pipelines in high-consequence areas;

• Plains had notice of regulatory violations because of warning letters from the PHMSA from 2009 and 2013 about Lines 901 and 903;

• Plains was indicted in Santa Barbara Superior Court in May 2016 on felony charges for its conduct related to the spill;

• the conclusions in the PHMSA's May 19, 2016 Failure Investigation Report were derived from Plains's own data;• Plains had received several other warning letters and notices of violations from the PHMSA in 2010, 2011, 2013, 2014, and 2016, about regulatory violations on its pipelines in other parts of the country;

• conclusions from the May 19, 2016 Failure Investigation Report detailing regulatory violations on Line 901;

• Plains did not perform adequate inspections or maintenance on its pipelines, had ineffective corrosion protection, did not have adequate leak-detection systems or monitoring, and did not adequately respond to the Line 901 spill, in violation of federal regulations;

• Plains's legal and regulatory compliance failures and pipeline-integrity deficiencies were allegedly reported to the individual defendants because of representations in Plains's Form 8–K underwriting agreements and Forms 10–K and 10–Q that Plains maintained disclosure controls and procedures designed to provide reasonable assurance that material information was "recorded, processed, summarized, and communicated" to Plains's officers;

• by virtue of Plains's audit committee's charter, the committee received notice of all potential or actual regulatory non-compliance that could "result in material non-compliance"; the committee in turn reported to the Board;

• two of the named defendants signed Sarbanes–Oxley Act certifications in Plains's Forms 10–K and 10–Q that "material information...[was] made known to [them]....";

• reports required by the Pipeline Inspection, Enforcement, and Safety ("PIPES") Act "could not be compiled or verified without the underlying data Plains obtained through its ILIs and excavations of Lines 901 and 903 throughout the class period"; and

• statements in Plains's Code of Business Conduct emphasized a commitment to compliance with applicable laws and a requirement that material deviations from pipeline-safety and environmental-protection measures must be approved by two of four senior executive officers.

The facts set out here are taken primarily from the Second Amended Consolidated Complaint, (Docket Entry No. 137).² The factual background pleaded in the earlier complaints, much of which is repeated in the Second Amended Complaint, is also set out in detail in the March 2017 Memorandum and Opinion. Op. at 3–21.

Although the Second Amended Complaint alleges more specific facts about Plains's pre-spill regulatory violations, the Second Amended Complaint still does not allege a strong inference of scienter. The new scienter allegations are, again, based on the defendants' positions within the company and certifications they signed affirming that senior executives had reviewed reports containing material information. These allegations are not enough to establish a cogent and compelling inference of scienter. The motions to dismiss, (Docket Entries No. 140, 141), are granted. This third effort to replead does not cure the deficiencies. The claims are dismissed with prejudice and without leave to amend, because further amendment would be futile.

The reasons for these rulings are explained in detail below.

I. The Parties and the Plaintiffs' Causes of Action

A. The Plaintiffs

The plaintiffs are individuals and institutional investors who purchased equity and debt instruments issued by entities affiliated with Plains All American Pipeline, a major national oil and gas pipeline owner and operator. 2d Compl. ¶¶ 16–20. The named plaintiffs seek to represent a class of investors who purchased Plains All American Pipeline, LP common units between February 27, 2013 and August 5, 2015, or who purchased Plains GP Holdings, LP ("Plains Holdings") Class A Shares between October 16, 2013 and August 5, 2015. The named plaintiffs also seek to represent individuals who purchased securities "pursuant and traceable to" the following public securities offerings:

• the Plains Holdings October 16, 2013 initial public offering of Class A shares ("IPO");

• the Plains Holdings November 12, 2014 public offering of Class A shares ("Secondary

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