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Nibur v. Sandridge Mississippian Trust I

United States District Court, W.D. Oklahoma

September 11, 2017

IVAN NIBUR, LAWRENCE ROSS, JASE LUNA, MATTHEW WILLENBUCHER, and the DUANE & VIRGINIA LANIER TRUST, Individually and On Behalf of All Others Similarly Situated, Plaintiffs,
v.
SANDRIDGE MISSISSIPPIAN TRUST I, et al., Defendants.

          ORDER

          VICKI MILES-LaGRANGE, UNITED STATES DISTRICT JUDGE

         Before the Court are the motions to dismiss of defendants SandRidge Mississippian Trust I, James D. Bennett, Matthew K. Grubb, and Tom L. Ward and nominal defendant SandRidge Energy, Inc. (“Moving Defendants”).[1] The motions have been fully briefed.

         I. Introduction[2]

         Nominal defendant SandRidge Energy, Inc. (“SandRidge”) is an oil and gas company headquartered in Oklahoma City. In December 2010, in an effort to monetize certain properties in the Mississippian lime formation, SandRidge created a royalty trust, Mississippian Trust (“Trust I”), and conveyed to Trust I royalty interests in 160 wells located in an area of mutual interest (“AMI”) spanning five counties in Northern Oklahoma (Alfalfa, Garfield, Grant, Major and Woods). The well interests conveyed to Trust I consisted of (1) a 90% interest in the revenue earned by SandRidge from 37 existing horizontal oil and gas wells that had already been drilled and begun producing oil and gas (the “Trust I Producing Wells”) and (2) a 50% interest in the revenue earned by SandRidge from 123 additional wells that had yet to be drilled (the “Trust I Development Wells”). In April 2011, Trust I conducted an initial public offering (“IPO”) in which it sold units representing beneficial interests in Trust I to investors.

         The registration statement for the IPO indicated that Trust I would pay quarterly cash distributions to investors from the sale of oil and gas produced by the Trust I Producing and Development Wells (“Trust I Wells”); oil sales were projected to contribute nearly 80% of that revenue. In preparation for the IPO, SandRidge collaborated with an independent petroleum engineering consultant to prepare a report that estimated the total oil and gas production expected from all the Trust I Wells over the 20-year lifetime of Trust I. The report estimated that (1) the future Trust I Development Wells would produce more oil, and less gas, in the aggregate than the Trust I Producing Wells, and (2) the ratio of oil-to-gas produced by all the Trust I Wells in the aggregate would be approximately 48.4% oil to 51.6% gas.

         Plaintiffs allege that by the end of February 2012, the Trust I Development Wells were producing considerably less oil, and considerably more gas, then the Trust I Producing Wells and that divergent production data between proximate Trust I Wells demonstrated a lack of geological uniformity in Alfalfa county. Plaintiffs further allege that SandRidge accelerated the drilling of the Trust I Development Wells, which boosted aggregate oil and gas production, and enabled Trust I to beat the quarterly distribution estimates in the Trust I registration statement during its first five reporting periods after the Trust I offering.

         In December 2011, SandRidge formed a second royalty trust, Mississippian Trust II (“Trust II”), to raise additional funds. SandRidge conveyed to Trust II royalty interests consisting of (1) 80% of SandRidge's revenue from 67 existing horizontal oil and gas wells that had already been drilled and begun producing oil and gas (the “Trust II Producing Wells”) within an AMI located in 9 counties in Oklahoma and Kansas, including Alfalfa, Grant, and Woods counties, and (2) 70% of SandRidge's revenue from 123 additional wells in the same AMI that had yet to be drilled (the “Trust II Development Wells”). In April 2012, Trust II conducted an IPO in which it sold units representing beneficial interests in Trust II to investors.

         On November 9, 2012, SandRidge held a conference call to discuss its third quarter 2012 earnings. On the call, SandRidge disclosed that oil production in the same regions of Oklahoma and Kansas where the Trust Wells were located had declined more steeply than expected, and, therefore, SandRidge was reducing its expected recovery of oil from those regions by approximately 25%. Over the next four trading days, the price of Trust I units fell by $4.14, or 21.8%, while the price of Trust II units fell by $4.00, or 20.7%. On January 31, 2013, after markets closed, Trusts I and II issued press releases announcing that the quarterly distribution to their unitholders for the September-November 2012 production period had missed the estimates in their respective registration statements, which was attributed to lower oil production. On February 1, 2013, the price of Trust I units fell by $0.56, or 2.9%, while the price of Trust II units fell by $2.73, or 14.4%. The price of Trust I units and Trust II units additionally fell when Trusts I and II were downgraded.

         On July 30, 2013, holders of common units in Trust I and Trust II were joined as plaintiffs in a putative securities class action that had been filed several months earlier by common stockholders of SandRidge. On May 11, 2015, the unitholders claims were dismissed. On June 9, 2015, plaintiffs filed the instant action asserting two independent claims. First, plaintiffs asserted claims and remedies against defendants under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and these claims have been dismissed. Second, plaintiffs assert claims and remedies against defendants under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995 (“PSLRA”) and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5) (“Exchange Act Claims”) on behalf of all persons who purchased or otherwise acquired Common Units of (1) Trust I, between April 5, 2011, and November 8, 2012, inclusive (the “Class Period”), and/or (2) Trust II, during the Class Period. Moving Defendants now move, pursuant to Federal Rule of Civil Procedure 12(b)(6), to dismiss the Exchange Act Claims.

         II. Discussion

         A. Summary of plaintiffs' Exchange Act Claims

         Plaintiffs allege that the Trust I registration statement projected that the Trust I Development Wells would produce approximately 18% more oil than the Trust I Producing Wells. Plaintiffs further allege that by the end of Trust I's second reporting period in August 2011, it had become clear to the Moving Defendants that Trust I would not meet its projections because through August 2011, the oil production of the Trust I Development Wells was only matching that of the Trust I Producing Wells (negative Trust I oil production trends). Given the premium price of oil, the shortfall in oil production from the Trust I Development Wells threatened to cause cash distributions to Trust I investors to miss the targets in the Trust I registration statement. Plaintiffs allege that since Moving Defendants were planning the Trust II IPO to finance their business plan, they specifically needed to showcase the success of the Trust I IPO. Thus, the failure of Trust I to meet targeted cash distributions would have derailed the Trust II IPO. Plaintiffs allege that to avoid this result, Moving Defendants sought to offset the weaker than projected oil production of the Trust I Development Wells by accelerating the drilling of those Wells and successfully masked the weaker oil production of individual Trust I Development Wells with higher aggregate oil production from a greater number of wells drilled than planned.

         Additionally, plaintiffs allege that in reporting Trust I's production and cash distribution beats on conference calls with analysts, Moving Defendants falsely stated, among other things, that oil production was “on trend” and “on target” even though the oil production of the Trust I Development Wells (accounting for two-thirds of the Trust I reserves) was not meeting forecasts. Plaintiffs further allege that Moving Defendants made these false and misleading statements with scienter. First, plaintiffs allege Moving Defendants were plainly in a position to know about and appreciate the significance of the Trust I Development Wells' poor oil production and stayed regularly informed of the Trust I well production. Second, plaintiffs allege that Moving Defendants had a motive to make false statements - by concealing the Trust I Development Wells' poor oil production, SandRidge was able to liquidate most of its Trust I units and complete the Trust II IPO.

         B. Pleading requirements of the PLSRA

         “[T]o state a claim under Section 10(b) of the [Exchange] Act and Rule 10b-5 a plaintiff must allege: (1) a misleading statement or omission of a material fact; (2) made in connection with the purchase or sale of securities; (3) with intent to defraud or recklessness; (4) reliance; and (5) damages.” City of Phila. v. Fleming Cos., Inc., 264 F.3d 1245, 1257-58 (10th Cir. 2001) (internal quotations and citation omitted). To curb abuse in private securities lawsuits, Congress enacted the PSLRA, which mandates a ...


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