Jagged Peak Energy Inc. v. Okla. Police Pension & Ret. Sys., 21SC334

Docket Nº21SC334
Citation2022 CO 54
Case DateNovember 21, 2022
CourtSupreme Court of Colorado

2022 CO 54

Jagged Peak Energy Inc.; Joseph N. Jaggers; Robert W. Howard; Shonn D. Stahlecker; Charles D. Davison; S. Wil Vanloh, Jr.; Blake A. Webster; Citigroup Global Markets Inc.; Credit Suisse Securities (USA) LLC; J.P. Morgan Securities LLC; Goldman, Sachs & Co.; RBC Capital Markets, LLC; Wells Fargo Securities, LLC; UBS Securities LLC; Keybanc Capital Markets, Inc.; ABN AMRO Securities (USA) LLC; Fifth Third Securities, Inc.; Petrie Partners Securities, LLC; Tudor, Pickering, Holt & Co. Securities, Inc.; BMO Capital Markets Corp.; Deutsche Bank Securities Inc.; Evercore Group L.L.C.; and Scotia Capital (USA) Inc., Petitioners
v.

Oklahoma Police Pension and Retirement System, individually and on behalf of all others similarly situated, Respondent

No. 21SC334

Supreme Court of Colorado, En banc

November 21, 2022


Certiorari to the Colorado Court of Appeals Court of Appeals Case No. 19CA1718

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Attorneys for Petitioners Jagged Peak Energy Inc.; Joseph N. Jaggers; Robert W. Howard; Shonn D. Stahlecker; Charles D. Davison; S. Wil Vanloh, Jr.; and Blake A. Webster:

Shoemaker Ghiselli + Schwartz LLC

Paul H. Schwartz

Andrew R. Shoemaker

Vinson & Elkins LLP

Andrew E. Jackson

Attorneys for Petitioners Citigroup Global Markets Inc.; Credit Suisse Securities (USA) LLC; J.P. Morgan Securities LLC; Goldman, Sachs & Co.; RBC Capital Markets, LLC; Wells Fargo Securities, LLC; UBS Securities LLC; Keybanc Capital Markets, Inc.; ABN AMRO Securities (USA) LLC; Fifth Third Securities, Inc.; Petrie Partners Securities, LLC; Tudor, Pickering, Holt & Co. Securities, Inc.; BMO Capital Markets Corp.; Deutsche Bank Securities Inc.; Evercore Group L.L.C.; and Scotia Capital (USA) Inc.:

Holland & Hart LLP

Holly Stein Sollod

Paul, Weiss, Rifkind, Wharton & Garrison LLP

Audra J. Soloway

Attorneys for Respondent:

Shuman, Glenn & Stecker

Rusty E. Glenn

Shuman, Glenn & Stecker

Kip B. Shuman

Scott+Scott Attorneys at Law LLP

Thomas L. Laughlin, IV

Donald A. Broggi

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Goldstein & Russell, P.C.

Thomas C. Goldstein

Attorneys for Amicus Curiae Securities Industry and Financial Markets Association:

Hogan Lovells U.S. LLP

Jessica Black Livingston

JUSTICE GABRIEL delivered the Opinion of the Court, in which JUSTICE HOOD, JUSTICE HART, JUSTICE SAMOUR, and JUSTICE BERKENKOTTER joined. JUSTICE MÁRQUEZ, joined by CHIEF JUSTICE BOATRIGHT, dissented.

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OPINION

GABRIEL, JUSTICE

¶1 In this case, we consider whether a division of the court of appeals misapplied federal case law when it concluded that respondent Oklahoma Police Pension and Retirement System ("Oklahoma") stated a plausible claim for relief under sections 11, 12(a)(2), and 15 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77k, 77l(a)(2), 77o, notwithstanding petitioners' assertions that the alleged misrepresentations at issue constituted immaterial "puffery" and amounted to claims based on hindsight, which are not actionable under federal law.[1] We conclude that the division's conclusion was consistent with applicable federal precedent, and we therefore affirm the division's judgment.

I. Facts and Procedural History

¶2 Because this case comes to us in the context of a C.R.C.P. 12(b)(5) motion to dismiss, we take the facts primarily from the allegations in Oklahoma's amended complaint.

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¶3 Jagged Peak Energy Inc. ("Jagged") is a Denver-based company that specializes in the exploration, development, and production of crude oil and natural gas. Jagged's development drilling plan is composed exclusively of horizontal, as opposed to vertical, drilling. Although a horizontal well can cost up to 300% more to drill and complete for production than a vertical well directed to the same target horizon, the additional cost is expected to be recovered from increased production.

¶4 Creating horizontal wells is a complicated process. Thus, oil and gas exploration and production companies like Jagged typically contract with third-party drilling companies to drill and service wells for them. These contract drilling service companies are generally compensated based on the amount of time that they work for the exploration and production companies and the costs that they incur during the engagement.

¶5 In January 2017, Jagged conducted an initial public offering ("IPO"), during which it sold over 31 million shares at a price to the public of $15.00 per share. In connection with this IPO, Jagged filed a registration statement and incorporated offering materials (collectively, the "offering documents") with the Securities and Exchange Commission ("SEC"). The Jagged officers and directors named individually as defendants in this case (the "individual defendants") each either signed or authorized the signing of the offering documents. Further, a number of

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investment banking houses that specialize in underwriting public offerings of securities (the "underwriter defendants") underwrote, served as financial advisors for, and assisted in the preparation and dissemination of Jagged's offering documents.

¶6 Oklahoma, a governmental pension system that provides pension and disability benefits for municipal police officers in the state of Oklahoma, purchased Jagged shares "pursuant to and/or traceable to the [IPO]." According to Oklahoma, within a short time after its investment, facts came to light indicating that Jagged, the individual defendants, and the underwriter defendants (collectively, "defendants") had negligently overstated Jagged's ability to increase its oil and gas production. As a result, the price of Jagged shares saw several notable declines, and except for a brief surge, Jagged's stock has traded well below its IPO price.

¶7 In light of the foregoing, Oklahoma filed a class action lawsuit in Denver District Court, alleging that defendants had made materially untrue statements and omissions in their offering documents in violation of sections 11, 12(a)(2), and 15 of the Securities Act. After the removal of this case to federal court and the case's subsequent remand back to the state district court, Oklahoma filed an amended complaint that added more than forty paragraphs of details to support its claim that Jagged had "negligently overstated [its] ability to increase its oil and

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gas production" by representing that it (1) "owned prime territory in the core oil producing window" of the area to be developed and (2) "had a highly experienced professional workforce capable of developing Jagged's property in an efficient and aggressive manner."

¶8 Although the amended complaint identifies as materially misleading multiple statements, sometimes paragraphs at a time, from Jagged's offering documents, the issues before us require us to take a closer look at just two.

¶9 The first statement, which the parties now refer to as "Statement 4," provided that Jagged's primary business objective was to "increase stockholder value through the execution of the following strateg[y]":

Maximize returns by optimizing drilling and completion techniques through the experience and expertise of our management and technical teams. Our experienced management and technical teams have a proven track record of optimizing drilling and completion techniques to drive well and field-level returns. We have experienced a significant decrease in our drilling and completion costs since 2014.

¶10 The second statement, which the parties now refer to as "Statement 2," provided that Jagged's "development drilling plan is comprised exclusively of horizontal drilling with an ongoing focus on reducing drilling times, optimizing completions and reducing costs."

¶11 Oklahoma alleged that both of these statements were materially untrue and misleading and omitted material information because Jagged had failed to disclose that (1) it had "hired inexperienced and wasteful employees and contractors to

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oversee and operate its drilling operations" in the development area at issue; (2) "the contractors had favorable provisions in their contracts with Jagged that gave them more money for increased costs"; and (3) as a result of such inefficient and unfavorable contract terms, Jagged had "incurred substantial and ongoing additional drilling and production costs." Oklahoma further alleged that Jagged violated Item 303 of Regulation S-K, 17 C.F.R. § 229.303(b)(2)(ii) (2021) (requiring, among other things, a securities registrant to "[d]escribe any known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations"), by failing to disclose "uncertainties about the quality of its workforce, the Company's practice of hiring inexperienced and wasteful contractors and employees, and how those employee inadequacies were reasonably likely to (and did) adversely impact Jagged's operating results."

¶12 Oklahoma contended that interviews with employees of Jagged and its contractors who worked for those entities "during the relevant period," as well as public records, provided further corroboration that the offering documents were false and misleading. Specifically, according to Oklahoma, the former employees who were interviewed observed that (1) Jagged's "two in-house geologists were inexperienced and incompetent," with one being deemed "not qualified" by a Jagged executive "due to his lack of relevant experience and this being his first job

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out of college"; (2) Jagged's CEO was aware of myriad problems and mistakes at the drilling sites; (3) Jagged was heavily dependent on a de facto "chief drilling contractor" who used his position "to award [contracts to] contractors he controlled," notwithstanding that their bids were "consistently lower" than all other bids; (4) the "chief drilling contractor" then overbilled Jagged; (5) another Jagged executive "continuously...

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