Securities Litigation Risks in the Energy Sector

One of the trends I noted in my analysis of securities class action lawsuit filings in the first half of 2012 was the apparent rise in securities suits against companies in the natural resources sector. Among other things, I noted that about 14.5% of first half filings were against companies in the natural resources industries, with the largest concentration of cases in the Crude Petroleum and Natural Gas category.

An August 21, 2012 memo from the King and Spaulding law firm entitled "Securities Litigation and the Energy Sector" (here) takes a closer look at the rising levels of litigation involving companies in the energy industry. Among other things, the article reports that securities class action lawsuits against energy companies "have increased in the past three years."

Among other reasons for the increase in litigation against companies in the energy industry has been the increase in the number of high profile events involving worker and environmental safety. As a result, safety disclosures have been a prominent part of securities class action lawsuits involving energy companies, including, most significantly, the class action lawsuits involving BP, Massey Energy and Transocean. In each of these cases, investors alleged that companies had misrepresented their safety records or safety procedures. In both the BP and Transocean cases the allegations related to safety were dismissed, based on the determination that general statements about corporate safety goals and commitments were not actionable because they were too vague. However, the Massey Energy case survived the dismissal motion.

Although not discussed at length in the law firm memo, another reason for the recent rise in litigation involving companies in the energy sector has been the surge of litigation against U.S.-listed Chinese companies. For example, of the 39 U.S.-listed Chinese companies sued in securities class action lawsuits in 2011, at least eight involved companies in the energy industry.

The most traditional source of litigation involving energy companies have been allegations of misrepresentations concerning reserve estimates. The law firm memo reviews questions that have arisen more recently regarding new procedures for estimating oil and gas reserves, and notes that "many industry and federal officials have questioned whether companies are taking advantage of the new rule by over-reporting reserves to increase their company's value." The memo notes that several federal agencies including the SEC are looking into the accuracy of reserve estimates. The SEC has in fact subpoenaed several companies, as have two states' attorney general offices. The law firm memo notes with respect to these investigations that:

The results of these investigations have yet to be seen. If any developments come from the subpoenas, then securities class actions and derivative suits will likely follow and we could see more cases like focused on false reserve reporting prior to 2010.

The law firm memo notes that hydraulic fracturing, or fracking, is a "hot button issue for many oil and gas companies." The SEC is among many regulators raising questions about fracking. In particular the SEC has shown interest in having companies provide greater disclosure about fracking. Using the comment-letter process, the SEC has required companies to provide additional information, for example, about specific operational and financial risks associated with fracking, or regarding the expenditures required to comply with regulatory requirements.

The law firm memo notes that the New York attorney general has subpoenaed a number of oil and gas companies "requesting information regarding disclosures about the environmental risks of fracking." The memo notes that how companies respond to these disclosure pressures "could lead to shareholder litigation and increased SEC involvement."

A number of factors have contributed to the recent rise in securities litigation involving companies in the energy industry. At least one factor - the rise in litigation involving U.S.-listed Chinese companies - seems unlikely to continue in the future. But as the law firm memo outlines, there are a number of other factors that suggest that companies in the energy sector could continue to face an elevated risk of securities litigation in the months and years ahead.

Libor-Related Claims and D&O Insurance: As I have previously noted, one of the big stories of the summer is the Libor-related scandal and follow on litigation. The scandal and ensuing litigation have a number of implications, not the least of which are the D&O insurance implications of the investigations and claims. An August 22, 2012 article in The Metropolitan Counsel entitled "Libor-Related Insurance Claims Provide A Roadmap To The Issues Faced By Policyholders In Large Exposure D&O Claims" (here) by Alexander Hardiman of the Anderson Kill law firm takes a brief look at the insurance issues involved in the Libor scandal-related claims.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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