Case 4:21-cv-00575 Document 76 Filed on 09/15/22 in TXSD Page 1 of 17
`United States District Court
`Southern District of Texas
`ENTERED
`September 15, 2022
`Nathan Ochsner, Clerk
`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF TEXAS
`HOUSTON DIVISION
`
`§
`
`§
`CIVIL ACTION NO. 4:21-cv-00575
`§
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`§
`§
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`
`
`IN RE APACHE CORP. SECURITIES
`LITIGATION
`
`
`
`MEMORANDUM AND RECOMMENDATION
`Pending before me is Defendants’ Motion to Dismiss Plaintiffs’ Consolidated
`Class Action Complaint (“Motion to Dismiss”). See Dkt. 71. Having reviewed the
`motion, the response, the reply, the pleadings, and the applicable law, I
`recommend that the Motion to Dismiss be DENIED.
`BACKGROUND
`This is a securities class action lawsuit brought by Lead Plaintiffs Plymouth
`County Retirement Association and the Trustees of the Teamsters Union No. 142
`Pension Fund (collectively, “Lead Plaintiffs”), individually and on behalf of those
`purchasers of the common stock of Apache Corporation (“Apache”) during the
`period from September 7, 2016 through March 13, 2020 (the “Class Period”). The
`defendants are Apache, an exploration and production company headquartered in
`the Houston area, and three of its top executives: (1) John J. Christmann IV
`(“Christmann”), Apache’s President and Chief Executive Officer; (2) Timothy J.
`Sullivan (“Sullivan”), Apache’s former Executive Vice President – Operations
`Support; and (3) Stephen J. Riney (“Riney”), Apache’s Executive Vice President
`and Chief Financial Officer. I will refer to Christmann, Sullivan, and Riney,
`collectively, as the “Individual Defendants.” Lead Plaintiffs bring claims under
`§§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”), and
`Rule 10b(cid:1)5 promulgated thereunder by the Securities Exchange Commission.
`Lead Plaintiffs’ live pleading is the Consolidated Class Action Complaint for
`Violations of the Federal Securities Laws (“Consolidated Class Action Complaint”).
`See Dkt. 65. In this 148-page pleading, Plaintiffs allege a massive fraud centering
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`on an oil and gas field in the Texas panhandle. The origins of this fraud, according
`to Lead Plaintiffs, began in the early 2010s when Apache endured a prolonged
`financial slump. As its competitors in the exploration and production industry
`capitalized on advances in hydraulic fracturing, Apache allegedly did not make a
`single notable discovery during the fracking boom. As a direct result, the
`company’s stock price languished. Plaintiffs cite a Houston Chronicle article,
`which observed that Apache “found itself on the outside looking in,” and
`management “knew Apache had to get back its swagger if it was to reverse its
`fortunes. It had to return to the business of risk, and it had to make a
`headline(cid:1)grabbing find.” Id. at 18.
`In an effort to make such a headline-grabbing find, Apache focused on a
`remote area of West Texas in Reeves County, dubbed “Alpine High.” On September
`7, 2016, the first day of the Class Period, Apache announced Alpine High as a major
`oil discovery in Texas. As alleged by Plaintiffs,
`For three years, Defendants touted Alpine High as a “transformational
`discovery” and “world class resource play” with immense production
`capabilities, including “conservative” estimates of over three billion
`barrels of oil and significant amounts of “really rich gas.” Defendants
`supported their claims by highlighting examples of “strong well
`results” and “successful oil tests” that were purportedly representative
`of Alpine High’s “2,000 to more than 3,000 future drilling locations,”
`which would “deliver incredible value to Apache and its shareholders
`for many, many years to come.” Analysts and industry media lauded
`this “massive shale discovery,” emphasizing that Alpine High’s
`“compelling economics” represented Apache’s “largest catalyst
`opportunity” for the coming years and put Apache “back in the game”
`after a “rough time keeping up with competitors.” Fueled by
`Defendants’ assurances, Apache’s stock price soared, reaching a Class
`Period high of $69.00 on December 12, 2016. The Individual
`Defendants took full advantage, reaping more than $75 million in
`Alpine High-linked compensation during the Class Period.
`
` .
`
` . .(cid:1)Unbeknownst to investors, Defendants’ statements were false. In
`reality, Apache’s own production data and analyses of the Alpine High
`play never supported Defendants’ public representations. As Apache
`was ultimately forced to admit, Alpine High was virtually barren.
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`Indeed, after three years of relentlessly touting Alpine High to
`investors, the “world class resource play” that was supposedly going
`to “transform” Apache produced less than 1% of the oil and gas that
`Defendants had represented to investors was recoverable. Alpine
`High was so devoid of oil and gas that Apache was forced to cease all
`drilling at the field in 2020, take a $3 billion write down, and slash its
`dividend by a staggering 90%. When the truth regarding Defendants’
`fraud emerged, analysts and
`the nation’s
`leading
`financial
`publications excoriated Defendants, noting that the revelations “were
`in stark contrast to [Defendants’] past defense of Alpine High,” and
`Apache’s stock price was decimated, closing at a mere $4.46 on March
`17, 2020—an astonishing decline of 93% from its high during the Class
`Period.
`
`Id. at 8-9 (cleaned up).
`
`This is not, Lead Plaintiffs insist, a situation in which a prospect turned out
`to be poor performing much to the surprise of those involved in the project.
`Instead, Lead Plaintiffs paint a sinister picture, claiming that Defendants touted
`the economic viability of Alpine High knowing full well that such statements were
`false. Based, in part, on statements from 24 confidential witnesses, the
`Consolidated Class Action Complaint asserts that Defendants lacked crucial data
`they needed to support impressive claims about Alpine High’s production
`capabilities. Even worse, Lead Plaintiffs contend that the data behind the play
`actually indicated that Alpine High was not commercially viable. Lead Plaintiffs
`maintain that Defendants nonetheless went ahead and widely broadcast
`overwhelmingly positive statements about this high-profile project.
`
`Defendants have moved to dismiss the Consolidated Class Action Complaint
`for failure to plead (i) an actionable false or misleading statement; or (ii) scienter
`with particularity as required by Federal Rule of Civil Procedure 9(b) and the
`Private Securities Reform Litigation Act (“PSLRA”).
`LEGAL FRAMEWORK
`
`Rule 12(b)(6) authorizes dismissal of a complaint when the plaintiff has
`failed to state a claim upon which relief can be granted. See FED. R. CIV. P. 12(b)(6).
`“To survive a motion to dismiss, a complaint must contain sufficient factual matter,
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`(cid:1)
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`accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v.
`Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544,
`570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual
`content that allows the court to draw the reasonable inference that the defendant
`is liable for the misconduct alleged.” Id. “Threadbare recitals of the elements of a
`cause of action, supported by mere conclusory statements, do not suffice.” Id. At
`this initial pleading stage, I am required to accept as true all well-pleaded factual
`allegations in the Consolidated Class Action Complaint. See Twombly, 550 U.S. at
`555–56.
`Rule 9(b) requires parties claiming fraud to “state with particularity the
`circumstances constituting fraud.” FED. R. CIV. P. 9(b). The allegations must
`include “the particulars of time, place, and contents of the false representations, as
`well as the identity of the person making the misrepresentation and what he
`obtained thereby.” Benchmark Elecs., Inc. v. J.M. Huber Corp., 343 F.3d 719, 724
`(5th Cir. 2003) (quotation omitted).
`Section 10(b) of the Exchange Act makes it unlawful to “use or employ, in
`connection with the purchase or sale of any security . . . any manipulative or
`deceptive device or contrivance in contravention of such rules and regulations as
`the [Securities and Exchange] Commission may prescribe.” 15 U.S.C. § 78j(b). Rule
`10b–5 implements § 10(b) by forbidding, among other things, the making of any
`“untrue statement of a material fact” or the omission of any material fact
`“necessary in order to make the statements made . . . not misleading.” 17 C.F.R
`§ 240.10b–5(b). “A § 10b–5 claim is subject to both Federal Rule of Civil Procedure
`9(b)’s requirement that fraud be pled ‘with particularity’ and . . . the requirements
`of the [PSLRA].” Abrams v. Baker Hughes Inc., 292 F.3d 424, 430 (5th Cir. 2002).
`Enacted by Congress in 1995, the PSLRA has “twin goals: to curb frivolous,
`lawyer-driven litigation, while preserving investors’ ability to recover on
`meritorious claims.” Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 322
`(2007). To accomplish this goal, the PSLRA contains “[e]xacting pleading
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`(cid:1)
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`requirements.” Id. at 313. Under the PSLRA’s heightened pleading requirements,
`a plaintiff seeking to state a § 10(b) and Rule 10b–5 claim must allege “(1) a
`material misrepresentation or omission by the defendant; (2) scienter; (3) a
`connection between the misrepresentation or omission and the purchase or sale of
`a security; (4) reliance upon the misrepresentation or omission; (5) economic loss;
`and (6) loss causation.” Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258,
`267 (2014) (quotation omitted).
`The scienter, or state of mind element of a § 10(b) and Rule 10b–5 claim, is
`“a mental state embracing intent to deceive, manipulate, or defraud.” Ernst &
`Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). “Scienter is satisfied by a
`showing of severe recklessness, i.e., an extreme departure from the standards of
`ordinary care.” Sec. & Exch. Comm’n v. World Tree Fin., L.L.C., 43 F.4th 448, 459
`(5th Cir. 2022) (quotation omitted). To allege scienter under the PSLRA, “the
`complaint shall, with respect to each act or omission alleged to violate this chapter,
`state with particularity facts giving rise to a strong inference that the defendant
`acted with the required state of mind.” 15 U.S.C. § 78u–4(b)(2)(A).
`Section 20(a) of the Exchange Act provides for joint and several liability for
`“controlling persons” who are found to have induced violations of the Exchange
`Act. 15 U.S.C. § 78t(a). “To impute liability to [the Individual Defendants]—the
`alleged ‘control persons’ of [Apache] under § 20(a) of the Securities Exchange
`Act—the investors ha[ve] to show a ‘primary violation’ under § 10(b): If the § 10(b)
`claim is inadequate, then so is the § 20(a) claim.” Mun. Emps.’ Ret. Sys. of Mich.
`v. Pier 1 Imps., Inc., 935 F.3d 424, 429 (5th Cir. 2019).
`ANALYSIS
`Lead Plaintiffs Adequately Plead Actionable Misrepresentations
`Defendants first argue that the Consolidated Class Action Complaint
`contains no well-pleaded allegations of an affirmative misrepresentation or
`omission. I disagree.
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`At the outset, I note that there is no dispute that Apache and the Individual
`Defendants made many optimistic statements during the Class Period about the
`commercial viability of Alpine Heights.1 For illustrative purposes, I note that
`Defendants promoted Alpine High as “an
`immense resource and a
`transformational discovery for Apache” that would “drive incremental growth and
`returns for years to come.” Dkt. 65 at 93; see also id. at 86 (“I’ve said it’s world
`class. This would compare it versus three – what other people would view as world-
`class resources, the Woodford SCOOP, the Marcellus, and the Eagle Ford . . . It
`stacks up as well as anything.”); id. at 109 (“[W]e are building out a world-class
`resource play that will change the course of Apache.”); id. at 115 (“There is a very
`large wet gas play and there will be a lot of rich gas but there will also be a lot of
`oil.”); id. at 118 (“Investors do not yet have an appreciation for the potential cash
`flow generation from the liquids play at Alpine High.”).
`As Defendants correctly note, “‘the standard for misrepresentation in this
`[omission] context is whether the information disclosed, understood as a whole,
`would mislead a reasonable potential investor.’” Dkt. 71 at 27 (quoting In re Enron
`Corp. Sec., Derivative & “ERISA” Litig., 238 F. Supp. 3d 799, 824 (S.D. Tex.
`2017)). At this early pleading stage, it is my responsibility to determine whether
`the totality of allegations indicate that representations made by Defendants
`concerning the commercial viability of Alpine High were materially false or
`misleading when made. To help me make this determination, Lead Plaintiffs
`emphasize that the Consolidated Class Action Complaint does not make naked
`assertions of falsity. Instead, Lead Plaintiffs allege, in great detail, that Defendants
`were fully aware that there was no reliable data to support the wildly enthusiastic
`
`(cid:1)
`1 The Consolidated Class Action Complaint describes the alleged misstatements in great
`detail. For convenience, Defendants put together an Appendix identifying in one,
`easy(cid:2)to(cid:2)use chart, each alleged misrepresentation made by Defendants. See Dkt. 71-1. For
`completeness, Lead Plaintiffs have copied Defendants’ Appendix A and added a column
`titled “Plaintiffs’ Response” that contains Lead Plaintiffs’ brief response to Defendants’
`arguments for why the alleged misstatements are not actionable. See Dkt. 74-2.
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`claims for Alpine High. By way of example, Lead Plaintiffs allege that Steven
`Keenan, the lead geologist Apache had tapped to discover the next big find,
`repeatedly told senior management in 2016 that the company did not have the data
`to announce the play, and would need at least nine more months of consistent
`production from numerous wells within the play to properly assess the commercial
`viability of Alpine High. Despite these warnings, Lead Plaintiffs contend, Apache
`made a grand announcement on September 7, 2016, hyping Alpine High’s
`attributes, performance, and commercial viability. If the Consolidated Class Action
`Complaint is to be believed, Apache senior management had no reason to make
`such rosy statements to the market concerning this new shale play. Possibly even
`more alarming is the lawsuit’s accusation that, in mid(cid:1)2019, Apache commenced
`an independent internal technical review of Alpine High. That review, named
`“Project Neptune,” reportedly concluded “that the vast majority of Apache’s Alpine
`High wells had never performed or produced anything like the Company had
`represented to the market.” Dkt. 65 at 46. “Instead, the current, recent, and
`historical production and performance were far worse than what Apache and
`Defendants had told investors.” Id. Lead Plaintiffs also allege that Apache’s top
`executive, Christmann, deliberately shielded critical Alpine High data from the rest
`of the company for years, thus precluding standard peer review practices from
`occurring.
`Over my career, both as a lawyer and as a judge, I have had the opportunity
`to review a vast number of securities class action lawsuits. Despite their usual
`length, many of those filings are cut-and-paste jobs that unquestionably fail to
`properly allege a false or misleading statement. This is not one of those complaints.
`The Consolidated Class Action Complaint provides a detailed discussion of the
`alleged misrepresentations at issue and explains the reasons why Defendants
`allegedly knew at the time they spoke publicly that those statements were
`materially false. See id. at 85-130. For that reason, I conclude that Lead Plaintiffs
`have sufficiently alleged that Defendants made materially false or misleading
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`(cid:1)
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`statements, a necessary prerequisite to stating a § 10(b) and Rule 10b–5 claim. See
`Camelot Event Driven Fund v. Alta Mesa Res., Inc., No. 4:19-CV-957, 2021 WL
`1416025, at *12 (S.D. Tex. Apr. 14, 2021) (sustaining fraud claims at the motion to
`dismiss stage where plaintiffs relied “on the accounts of two production engineers,
`[to] allege that [defendants] clandestinely used unconventional and unsustainable
`drilling methods to inflate reserve and earnings estimates”).
`B.(cid:1)
`The PSLRA’s Safe Harbor Provision Does Not Protect Defendants’
`Alleged Misstatements
`Defendants contend that many of the alleged misstatements contained in
`the Consolidated Class Action Complaint constitute forward-looking statements
`protected by the PSLRA's safe harbor provision. The PSLRA’s safe harbor provides,
`in relevant part, that a forward-looking statement is not actionable if (1) the
`statement is accompanied by “meaningful cautionary statements identifying
`important factors that could cause actual results to differ materially from those in
`the forward-looking statement”; or (2) if “the plaintiff fails to [plead] that the
`forward-looking statement . . . was made with actual knowledge . . . that the
`statement was false or misleading.” 15 U.S.C. § 78u-5(c)(1)(A–B).
`Defendants assert that the “vast majority” of the Consolidated Class Action
`Complaint’s alleged misstatements are forward-looking statements that fall within
`the PSLRA’s safe harbor. Dkt. 71 at 29. In my view, Defendants are overreaching.
`Even a cursory review of the alleged misstatements (conveniently listed on the
`dueling Appendixes provided by the parties) indicates that many are statements of
`current or historical fact, which are not protected by the PSLRA’s safe harbor. See
`In re BP p.l.c. Sec. Litig., 852 F. Supp. 2d 767, 799–800 (S.D. Tex. 2012) (“[T]he
`challenged statements are presented as a representation of [the defendant’s] past
`achievements . . . and are not forward-looking.”); In re TETRA Techs., Inc. Sec.
`Litig., No. 4:08-CV-0965, 2009 WL 6325540, at *32 (S.D. Tex. July 9, 2009) (“[A]
`statement of historical fact cannot be protected by the safe harbor.”). To the extent
`some of the alleged misstatements contain forward-looking elements, many of
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`(cid:1)
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`them incorporate factual assertions, rendering the safe harbor inapplicable. See
`Spitzberg v. Houston(cid:1)Am. Energy Corp., 758 F.3d 676, 691 (5th Cir. 2014) (“[A]
`mixed present/future statement is not entitled to the safe harbor with respect to
`the part of the statement that refers to the present.” (quotation omitted)); Rougier
`v. Applied Optoelectronics, Inc., No. 4:17-CV-2399, 2019 WL 6111516, at *10 (S.D.
`Tex. Mar. 27, 2019) (“A forward-looking statement . . . whose falsity consists of a
`lie about a present fact is not protected by the PSLRA’s safe harbor provision.”).
`Even if all the alleged misstatements can, nonetheless, be construed as
`forward-looking, I still do not believe the safe harbor provides a panacea for
`Defendants. Because the Consolidated Class Action Complaint alleges that the
`Defendants knew that their statements were misleading at the time they were
`made, the key question becomes whether those statements were accompanied by
`meaningful cautionary language. See Carlton v. Cannon, 184 F. Supp. 3d 428, 453
`(S.D. Tex. 2016) (“Even if the plaintiffs show actual knowledge, the safe harbor
`may still apply if the statement . . . is identified as forward looking and is
`accompanied by meaningful cautionary language.”). And what is meant by the
`phrase “meaningful cautionary language”? The Fifth Circuit has explained that
`“formulaic” and “generic” disclaimers cannot protect forward-looking statements
`because “Congress clearly intended that boilerplate cautionary language not
`constitute ‘meaningful cautionary’ language for the purpose of the safe harbor
`analysis.” Lormand v. US Unwired, Inc., 565 F.3d 228, 244–45 (5th Cir. 2009);
`see also Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353, 372 (5th Cir.
`2004) (“The requirement for
`‘meaningful’ cautions calls for
`‘substantive’
`company(cid:1)specific warnings based on a realistic description of the risks applicable
`to the particular circumstances, not merely a boilerplate litany of generally
`applicable risk factors.”); Rombach v. Chang, 355 F.3d 164, 173 (2d Cir. 2004)
`(The safe harbor would not protect “someone who warns his hiking companion to
`walk slowly because there might be a ditch ahead when he knows with near
`certainty that the Grand Canyon lies one foot away.”).
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`(cid:1)
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`Here, the language Defendants primarily rely on for the safe harbor to apply
`provides that any company statements were subject to “a number of risks and
`uncertainties which could cause our actual results, performance, and financial
`condition to differ materially from our expectations.” Dkt. 71 at 30. Defendants’
`generic use of terms such as “risks” and “uncertainties” fails to provide substantive,
`company-specific warnings based on a realistic description of the risks applicable
`to the particular circumstances, as the Fifth Circuit requires. Indeed, the Fifth
`Circuit in Lormand expressly rejected similar cautionary-disclaimer language,
`refusing to apply the safe harbor when the company’s disclaimer stated: “These
`forward-looking statements
`involve numerous
`risks, uncertainties and
`assumptions, and actual results could differ materially from anticipated results.”
`Lormand, 565 F.3d at 245. As for the more specific warnings that Defendants point
`to, like warning of “the risk that Apache will not encounter commercially
`productive oil and gas reservoirs” (Dkt. 71 at 30), these warnings are insufficient
`because “[w]hen risks have already begun to materialize, it is no longer sufficient
`to generally warn of the possibility of these risks in the future.” Marcus v. J.C.
`Penney Co., Inc., No. 6:13-CV-736-MHS-KNM, 2015 WL 5766870, at *3 (E.D. Tex.
`Sept. 29, 2015). Accepting Lead Plaintiffs’ allegations as true, at the start of the
`Class Period, Defendants had years of data indicating that Apache would not
`encounter commercially productive oil and gas reservoirs. Accordingly, far more
`specific warnings were required to bring Apache’s statements within the safe
`harbor. I thus conclude that Defendants’ cautionary statements are not
`meaningful. The result is that the PSLRA’s safe harbor provision does not apply.
`C.(cid:1)
`Lead Plaintiffs Adequately Plead Actionable Misleading
`Statements of Opinion
`Defendants next argue that the “vast majority” of alleged misstatements
`identified in the Consolidated Class Action Complaint qualify as non-actionable
`opinions. Dkt. 71 at 31. Because § 10(b) liability follows only from an “untrue
`statement” or “omi[ssion]” of “material fact,” 15 U.S.C. § 78u-4(b)(1)(A–B),
`
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`(cid:1)
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`Defendants note that statements of opinion are not actionable under federal
`securities laws simply because they allegedly “turned out to be wrong.” Omnicare,
`Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 575 U.S. 175, 186
`(2015). That is true, but “certain opinion statements can be actionable as well, since
`‘the disclosure required by the securities laws is measured not by literal truth, but
`by the ability of the statements to accurately inform rather than mislead
`prospective buyers.’” Police & Fire Ret. Sys. of City of Detroit v. Plains All Am.
`Pipeline, L.P., 777 F. App’x 726, 730 (5th Cir. 2019) (quoting Lormand, 565 F.3d
`at 248); see also Omnicare, 575 U.S. at 193 (“[T]he phrases ‘we believe’ or ‘we
`think’ . . . can preface nearly any conclusion, and the resulting statements, as we
`have shown, remain perfectly capable of misleading investors”). The Supreme
`Court’s Omnicare opinion “clarifies how a trial court should evaluate whether a
`plaintiff has alleged an actionably misleading statement of opinion.” Del. Cnty.
`Emps. Ret. Sys. v. Cabot Oil & Gas Corp., No. CV H-21-2045, --- F. Supp. 3d ---,
`2022 WL 3227584, at *9 (S.D. Tex. Aug. 10, 2022). Under Omnicare, opinion
`statements are actionable if the speaker did not sincerely hold that opinion, or if
`the plaintiffs allege that “(i) the speaker ‘omit[ted] material facts about the issuer’s
`inquiry into or knowledge concerning a statement of opinion,’ and (ii) ‘those facts
`conflict with what a reasonable investor would take from the statement itself.’” In
`re BP p.l.c. Sec. Litig., No. 4:10-MD-2185, 2016 WL 3090779, at *9 (S.D. Tex. May
`31, 2016) (quoting Omnicare, 575 U.S. at 189).
`As an initial matter, I am not convinced, as Defendants claim, that the “vast
`majority of the [alleged misstatements] qualify as opinions.” Dkt. 71 at 31. But even
`if I assume that virtually all the alleged misstatements are opinions, those opinions
`are actionable under Supreme Court precedent. As Lead Plaintiffs point out,
`“Defendants repeatedly made highly specific and authoritative Alpine High
`estimates, including about its volumes of recoverable oil and gas, drilling locations,
`and commercial viability.” Dkt. 74 at 54. Under Omnicare, each of these alleged
`misstatements is actionable because Defendants purportedly concealed material
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`facts, including that (i) the Apache geologists responsible for exploring and
`developing Alpine High did not believe the data supported the company’s
`grandiose predictions; (ii) top Apache management blocked Alpine High data from
`being vetted under the standard peer review processes that were otherwise utilized
`at Apache; and (iii) the underlying data never supported the sky-high estimates
`offered by Apache senior management. In short, Lead Plaintiffs have sufficiently
`alleged that Defendants omitted material factual information that would render
`their statements misleading to a reasonable investor under the Omnicare rubric.
`At this juncture, I conclude that Lead Plaintiffs’ alleged misrepresentations, even
`those based on opinions, survive to see another day.
`D.(cid:1) Lead Plaintiffs Adequately Plead Scienter
`As a final matter, Defendants maintain that the Consolidated Class Action
`Complaint fails to establish a strong inference of scienter, as required by the
`PSLRA. To allege scienter under the PSLRA, the plaintiff must plead, with
`particularity, facts giving rise to a strong inference(cid:1)of either an “intent to deceive,
`manipulate, or defraud.” Ernst & Ernst, 425 U.S. at 193 n.12. Because “there will
`rarely be direct evidence of intent to defraud,” In re Fleming Cos. Inc. Sec. &
`Derivative Litig., No. 503-MD-1530, 2004 WL 5278716, at *11 (E.D. Tex. June 16,
`2004), a plaintiff may allege scienter “by pleading facts giving rise to a strong
`inference of recklessness or conscious misconduct.” Nathenson v. Zonagen Inc.,
`267 F.3d 400, 410 (5th Cir. 2001). “A complaint will survive . . . only if a reasonable
`person would deem the inference of scienter cogent and at least as compelling as
`any opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at
`324. “When analyzing a complaint for scienter, a court must ‘assess all the
`allegations holistically,’ not in isolation.” Owens v. Jastrow, 789 F.3d 529, 536 (5th
`Cir. 2015) (quoting Tellabs, 551 U.S. at 326); see also Lormand, 565 F.3d at 251
`(“The inquiry is whether all of the facts alleged, taken collectively, give rise to a
`strong plausible inference of scienter, not whether any individual allegation,
`scrutinized in isolation, meets that standard.”). A district court must also consider
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`“plausible, nonculpable explanations for the defendant’s conduct, as well as
`inferences favoring the plaintiff.” Tellabs, 551 U.S. at 323–24. “Appropriate
`allegations of motive and opportunity may meaningfully enhance the strength of
`the inference of scienter,” but allegations of motive and opportunity, without more,
`will not fulfill the pleading requirements of the PSLRA. Owens, 789 F.3d at 540
`(quotation omitted).
`Turning to the inference of scienter in this case, I concede that this is a close
`call. A very close call. As I examined the scienter issue, I went back and forth as to
`whether Lead Plaintiffs’ scienter allegations pass muster. In the end, I rely heavily
`on the Fifth Circuit’s instruction that “where there are competing inferences that
`establish or negate the scienter requirement, ‘a tie favors the plaintiff’ on a motion
`to dismiss.” Spitzberg, 758 F.3d at 686 (quoting Lormand, 565 F.3d at 254).
`Lead Plaintiffs claim that they have adequately alleged a strong inference of
`scienter through a detailed recitation of the purported fraud in the Consolidated
`Class Action Complaint. In a nutshell, Lead Plaintiffs contend that Defendants,
`desperate to reverse Apache’s slumping performance and announce a major U.S.
`shale play, initially touted Alpine High as a huge prospect although such
`statements lacked any reasonable basis. According to Lead Plaintiffs, extensive
`geologic testing Apache conducted between 2012 and 2014 indicated that Alpine
`High was not a viable oil play. Then, near the start of the Class Period, a team of
`technical experts who had reevaluated the asset purportedly advised Apache senior
`management that the company lacked the technical data and analyses to make
`reasonable statements or projections about future production from Alpine High.
`Apache management disregarded these explicit warnings and moved forward with
`a major public announcement and glowing reports on how Alpine High would
`drive shareholder value for years to come. As alleged, the summer of 2019
`witnessed growing friction among high-level Apache management as the company
`had still not escaped from the doldrums. The company launched an internal
`investigation of Alpine High, which concluded that: “(1) the vast majority of Alpine
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`High wells never performed or produced anywhere close to the manner in which
`they were presented to investors; (ii) from the outset, Alpine High produced only
`limited quantities of poor quality of oil and gas; and (iii) any price pressure
`destroyed the economic viability of Alpine High.” Dkt. 65 at 123. Nonetheless, Lead
`Plaintiffs assert, Defendants failed to come clean and acknowledge the project’s
`severe limitations. Instead, Defendants stuck to their guns, defended the economic
`viability of Alpine High, and moved forward with the project on a wing and a
`prayer.
`For purposes of determining “whether a statement made by the corporation
`was made by it with the requisite Rule 10(b) scienter,” the Fifth Circuit holds that
`it is “appropriate to look to the state of mind of the individual corporate official or
`officials who make or issue the statement . . . rather than generally to the collective
`knowledge of all the corporation’s officers and employees acquired in the course of
`their employment.” Southland, 365 F.3d at 366. In this case, Lead Plaintiffs’
`scienter allegations are based, in part, on statements from a bevy of confidential
`witnesses, many of whom confirm that the Individual Defendants received regular
`reports and updates on Alpine High, making the Individual Defendants fully aware
`of the play’s limitations. In particular, the live pleading alleges that “Keenan was
`‘intimately aware’ of production, drilling and completions at Alpine High through
`Daily Operations Meetings and Weekly Production Meetings,” and he “routinely
`updated Defendants Christmann and Sullivan regarding Alpine High throughout
`the Class Period during both Quarterly Review Meetings in San Antonio as well as
`during Kennan’s monthly trips to Apache’s corporate headquarters in Houston.”
`Dkt. 65 at 125. Riney also allegedly “closely tracked the status of each Alpine High
`well,” id. at 125