Four years after Chesapeake Energy Corp. was targeted by a class action for allegedly misleading investors, Orrick has helped the company achieve complete vindication with a win on summary judgment.
The class action, United Foods and Commercial Workers Union, et al. vs. Chesapeake Energy Corporation, et al., alleged that Chesapeake violated Sections 11 and 12 of the Securities Act in connection with a July 9, 2008, public offering. The complaint alleged that Chesapeake had omitted from its registration statement certain material facts that, when later revealed, caused Chesapeake’s stock price to drop by well over 50 percent. Specifically, plaintiffs alleged that Chesapeake failed to disclose in sufficient detail (1) the risks associated with its hedging strategy, (2) the company’s “exposure” to Lehman Brothers resulting from hedging contracts, and (3) that CEO Aubrey McClendon lacked sufficient liquid assets to satisfy margin calls on the 29 million shares of Chesapeake stock he held in margin accounts.
Chesapeake argued that the company’s stock drop was actually a product of the 2008 market crash, which had caused massive stock drops for hundreds of U.S. companies, and that the alleged omissions were immaterial as a matter of law. Judge Timothy DeGuisti of the Western District of Oklahoma agreed, holding that Chesapeake could not have anticipated the crash and was thus under no duty to disclose information that only became material, if at all, until after the crash occurred. Judge DeGuisti emphasized in his decision that post hoc reasoning cannot be used to impose liability under the securities laws, and agreed with Chesapeake that a company need not disclose every possible permutation of a risk, nor disclose speculative future events that cannot be reasonably predicted.
Orrick’s victory in this case is notable because Section 11 and 12 claims brought under the Securities Act are more difficult to defend than a typical Section 10(b) securities fraud case. In a non-fraud case like this, plaintiffs only need to prove that the company’s public filings contained a material misrepresentation or omission – they do not have to prove that defendants acted with fraudulent intent or that investors’ losses were actually caused by the alleged securities violations. Defendants therefore lack many of the usual litigation tools to aid in their defense.
Orrick’s win is also notable because materiality is typically considered a question for the jury, or, at the very least, a question to be decided after discovery is complete. Here, Chesapeake not only moved for summary judgment before discovery even began (and thus potentially risked foregoing a later motion for summary judgment after the close of discovery), but did so on the basis of materiality, an aggressive move that yielded an excellent result for the client.