Rubinstein v. Collins

• Decision Date: 05 May 1994
• Docket Number: No. 92-2736,92-2736
• Parties: Fed. Sec. L. Rep. P 98,195 Judith RUBINSTEIN, Individually and on Behalf of All Others Similarly Situated, and Howard Greenwald, Individually and on Behalf of All Others Similarly Situated, Plaintiffs-Appellants, v. J. Patrick COLLINS, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 160

20 F.3d 160

Fed. Sec. L. Rep. P 98,195

Judith RUBINSTEIN, Individually and on Behalf of All Others

Similarly Situated, and Howard Greenwald,

Individually and on Behalf of All Others

Similarly Situated, Plaintiffs-Appellants, v. J. Patrick COLLINS, et al., Defendants-Appellees.

No. 92-2736.

United States Court of Appeals, Fifth Circuit.

May 5, 1994.

Richard B. Drubel, Cyrus D. Marter, IV, Houston, TX, Sherrie R. Savett, Berger & Montague, Philadelphia, PA, for plaintiffs-appellants.

Gregory P. Joseph, Fried, Frank, Harris, Shriver & Jacobson, New York City, Gerard G. Pecht, Fulbright & Jaworski, Houston, TX, for defendants-appellees.

Appeal from the United States District Court for the Southern District of Texas.

Before GOLDBERG, GARWOOD, and WIENER, Circuit Judges.

WIENER, Circuit Judge:

In this securities fraud case, Plaintiffs-Appellants Judith Rubinstein and Howard Greenwald ("Plaintiffs") appeal the order of the district court dismissing their complaint pursuant to Rule 12(b)(6) ¹ for failure to state a claim. Plaintiffs sought relief under Sec. 10(b) ² and Sec. 20(a) ³ of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 ⁴ promulgated thereunder. The district court dismissed these claims by applying what has been called the "bespeaks caution" doctrine, holding that economic forecasts and predictions are not actionable when such statements are couched in cautionary language. As we conclude that the district court erred in applying the "bespeaks caution" doctrine too broadly, essentially as a per se bar to liability, we reverse the dismissal of these federal claims and remand.

Plaintiffs also assert a fraud claim and a negligent misrepresentations claim under Texas common law. The district court likewise dismissed these claims pursuant to Rule 12(b)(6), holding that economic predictions and forecasts are not actionable under Texas law. As we conclude that the court erred in holding that such statements (hereafter referred to generically--but not as a term of art--as "predictive statements") may never be actionable, we also reverse the dismissal of these state claims and remand.

I FACTS ⁵ AND PROCEEDINGS

The parties to this appeal are: 1) the corporate Defendant-Appellee, Plains Resources, Inc. ("Plains"), which is a Texas-based independent oil and natural gas exploration and production company operating primarily in the Gulf Coast and mid-continent regions of the United States, and the seven affiliated individual Defendants-Appellees, i.e., J. Patrick Collins, William H. Hitchcock, Greg L. Armstrong, William C. Egg., Jr., Phillip D. Kramer, Michael P. Patterson, and Thomas H. Delimitros, who hold various executive and board positions with Plains; ⁶ and 2) the two named plaintiffs, Greenwald and Rubinstein, who acquired and sold shares of Plains stock during the period of the alleged misrepresentations by the defendants (and who purport to represent other similarly situated buyers and sellers of Plains stock).

The alleged misrepresentations are found in statements made by defendants concerning the value of newly discovered natural gas reserves found as a result of Plains' drilling operations under an exploration agreement with Texaco. This agreement "farms out" to Plains the exclusive exploration rights to a 13,000 acre tract in southwest Cameron Parish, Louisiana, called the "Miami Fee." Under this agreement, Plains is obligated to conduct certain exploration activities, and, after pay-out (i.e. recovery of certain costs), Plains is entitled to a 39% working interest in all producing wells it drills in that tract.

Initial News Reports

This saga began on August 19, 1991, when Plains announced publicly that it had made a significant natural gas discovery based on On October 17, 1991, Plains announced the results of the initial test of the discovery well, reporting that gas flowed at an approximate daily rate of 23.5 million cubic feet ("Mmcf") of natural gas and 1,353 barrels of condensate on a 3/8-inch choke, with a flow-tube pressure of 8,551 pounds per square inch ("psi") and an initial shut-in pressure of 10,764 psi. Analysts commented that these tests suggested that the well and the field in which it was located were extremely valuable, possibly one of the largest onshore discoveries of natural gas in recent years.

"what appears to be a substantial pay" ⁷ in its Miami Fee No. 1 well (the "discovery well"). The next day analyst Phillip Pace of First Boston reported that the prospect could hold 500 billion cubic feet ("bcf") of natural gas. Of this report, Defendant-Appellee Collins, President and CEO of Plains, observed "I would not be critical of Pace's comments." The market price of Plains stock rose overnight from $7.63 per share to $15.25.

During the next week the Plains announcement was commented on by many financial analysts, one of whom estimated that the field could contain as much as one trillion cubic feet of natural gas. According to these analysts, Plains supported the optimistic tone of these observations. Specifically, Plains' investor relations manager, Nancy Kirby, was quoted as having stated that "[t]he level of condensate production is unusually high and is significant because it commands far higher prices than natural gas." She was also reported to have said that the energy content of the gas was exceptionally rich; she originally reported the energy content as 1,170 British Thermal Units ("BTUs") per 1000 cubic feet of gas ("mcf"), then corrected this to 1,200 BTUs per mcf.

Meanwhile, on October 23, 1991, Defendant-Appellee Armstrong, the Chief Financial Officer of Plains, was reported to have characterized as "realistic" an analyst's opinion that the well could yield 500 bcf of gas and that the asset value of Plains was between $66 to $100 per share. Armstrong was also reported to have stated that--based on the results from the initial test of the discovery well--a cash-flow estimate of $26 million to $32 million for fiscal year 1992 was feasible. According to the analysts, Kirby confirmed Armstrong's cash-flow and asset-value estimates. On the same day that these announcements were made, Plains stock reached a record high of $29 1/8 per share on record volume of more than one million shares.

Plaintiffs allege that all was not well, however. Specifically, they aver that the defendants knew--or were reckless in not knowing--that Armstrong's and Kirby's statements of October 23rd were materially misleading. According to Plaintiffs, these predictive statements were materially misleading because the initial test of the discovery well did not provide a reasonable basis for such statements. Moreover, the defendants had not disclosed certain materially adverse facts regarding this initial test; specifically, that there had been a drop in flow-tube pressure and a decline in shut-in pressure. Plaintiffs contend that these decreases in pressure suggested that the reserves were much smaller than originally projected.

The Public Offering

On November 8, 1991, Plains filed a registration statement for a proposed secondary public offering of 1.5 million shares of its common stock, of which 910,000 were to be sold by Plains and 590,000 by certain existing stockholders. The registration statement reiterated the initial test results, then went on to assert:

Although there is insufficient production history and other data available to definitively quantify the proved reserves attributable to this discovery, the Company believes, based upon well logs, sidewall core analyses and initial production test results, that the Miami Fee # 1 well is a significant discovery that, when fully evaluated, could add substantially to the Company's oil and natural gas reserves. There can be no assurance, however, that subsequent production, drilling and other data will not cause the Company to reevaluate its assessment Plaintiffs allege that this registration statement was misleading for the same reasons that the October 23rd statements were misleading--defendants both knew that the discovery well testing done up to that time was not sufficient to provide a reasonable basis for these statements, and failed to disclose the declines in flow-tube and shut-in pressures.

of the significance of this discovery.

The discovery well began operating in November 1991. Sales of gas and condensate commenced on November 12th and continued until the well was shut-in on November 27th--a fact that was not disclosed until December 16, 1991. During this operating period of roughly two weeks, the well produced at rates generally lower than the ones reported in the initial testing. Moreover, once the well was placed in production the flow-tube pressure declined immediately and significantly.

On November 15th and 20th--a time when the discovery well was in operation--several of the individual defendants exercised their stock options, then immediately sold most of their newly acquired stock on the open market. In total, these defendants sold 32,426 shares at prices ranging from $22.50 to $25.16 a share. The aggregate proceeds from these sales was $760,599. ⁸ Plaintiffs contend that these defendants exercised their options then sold this newly acquired stock despite having material inside information concerning the drop in flow-tube pressure and the decline in the daily production rate of gas and condensate.

On December 4, 1991, the defendants for the first time disclosed some of the adverse information regarding the discovery well. Specifically, a press release was issued revealing that the flow-tube pressure had suddenly dropped and that the shut-in pressure had declined from 10,764 psi to 8,760 psi. The release further stated that more tests were being conducted and that, until these tests were complete and the results analyzed, Plains would be unable to ascertain the precise cause of these pressure declines.

The market reacted immediately to these adverse disclosures: The price...