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In re Plains All American Pipeline, L.P. Securities Litigation

United States District Court, S.D. Texas, Houston Division

March 30, 2018



          Lee H. Rosenthal Chief United States District Judge.

         I. Background

         This Memorandum and Opinion addresses the defendants' second motion to dismiss this securities-fraud amended complaint. The complaint arises from a highly publicized oil spill in an environmentally sensitive area on the California coast. The defendants responded, according to the plaintiffs, with a series of misrepresentations about the extent of the spill and the financial impact on Plains, the oil and gas pipeline owner and operator. The plaintiffs contend that Plains falsely claimed to have a comprehensive, effective environmental and regulatory compliance program to prevent oil spills and, if they occurred, to quickly remediate the effects. When the facts emerged, the stock price dropped. A putative class of stockholders sued the company, its officers and directors, and the banks that underwrote some of its securities offerings, seeking compensation for their stock-price losses.

         On March 29, 2017, the court issued a lengthy Memorandum and Opinion addressing the defendants' first motions to dismiss. The court dismissed the plaintiffs' claims, without prejudice and with leave to amend. (Docket Entry No. 136).[1] The specific rulings were as follows:

• The Exchange Act claims were dismissed, without prejudice and with leave to amend, because: (1) the majority of the statements, as pleaded, were not actionably misleading, and (2) the plaintiffs did not allege facts that gave rise to a strong inference of scienter for any defendant for any statement. Op. at 32-33;
• Some of the Exchange Act claims were found potentially actionable, but not as pleaded, including two legal-compliance statements in Plains's agreements with the Underwriter defendants:
(1) “None of the Issuers, the GP Entities or the Material Subsidiaries is in violation of any law, statute, ordinance, administrative or governmental rule or regulation applicable to it or of any decree of any court or governmental agency or body having jurisdiction over it . . . .”; and
(2) “Environmental Compliance. Except as described in the Pricing Disclosure Package and the Prospectus, none of the Plains Entities, directly or indirectly, has violated any environmental, safety, health or similar law or regulation applicable to its business relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”), or lacks any permits, licenses or other approvals required of them under applicable Environmental Laws to own, lease or operate their properties and conduct their business as described in the Pricing Disclosure Package and the Prospectus or is violating any terms and conditions of any such permit, license or approval, which in each case would reasonably be expected to have a Material Adverse Effect.” Op. at 61.
• A statement about corrosion control on the Plains website and three post-spill statements by Plains's safety and security director, Patrick Hodgins, were actionably misleading, as pleaded, including:
(1) a statement on Plains's website that it “perform[s] scheduled maintenance on all of our pipeline systems and make[s] repairs and replacements when necessary or appropriate, ” Op. at 41;
(2) Hodgins's statement that “[t]he first time I heard anything about the corrosion is what I read in the newspapers . . . . We had no indication at all to assume there was an issue, ” Op. at 74-75;
(3) Hodgins's statement, when asked whether the 2007 or 2012 in-line inspection runs had uncovered any sections of line 901 with metal loss greater than 50 percent, that Plains “had not had any indication at that time, ” id.; and
(4) Hodgins's failure to correct a spill-estimate figure, when asked about a 105, 000 gallon spill volume, despite Plains's alleged knowledge that the spill volume could be much larger. Id.
• The four statements that were actionably misleading as pleaded-Hodgins's three statements and the statement about corrosion control on Plains's website-were not set out with an alleged basis for a strong inference of scienter. Op. at 76-77.
• The plaintiffs' “general” allegations of scienter as to the statements held to be false or misleading were insufficient. Op. at 77-88.
• The defendants' loss-causation arguments were not a sufficient basis to dismiss the case. Op. at 89.
• The court rejected the plaintiffs' “class standing” argument; held that the plaintiffs who did not purchase notes in or traceable to the August 2013, September 2014, or the two December 2014 notes offerings did not have standing; and dismissed the plaintiffs' claims under § 11 and § 12(a)(2) of the Securities Act for those offerings, for lack of subject-matter jurisdiction. Op. at 97.

         The court dismissed the plaintiffs' Exchange Act and Securities Act claims, without prejudice and with leave to amend. Op. at 98. The plaintiffs filed a Second Amended Consolidated Complaint. (Docket Entry No. 137). The Plains defendants and the Underwriter defendants have moved to dismiss this amended pleading. (Docket Entries No. 140, 141). The plaintiffs responded, and both groups of defendants separately replied. (Docket Entry Nos. 142, 143, 144). The court held a hearing at which it heard arguments on the motions.

         The primary new factual allegations in the Second Amended Complaint are:

• some of Plains's statements apply “specifically - and exclusively” to its pipelines in high-consequence areas;
• Plains had notice of regulatory violations because of warning letters from the PHMSA from 2009 and 2013 about Lines 901 and 903;
• Plains was indicted in Santa Barbara Superior Court in May 2016 on felony charges for its conduct related to the spill;
• the conclusions in the PHMSA's May 19, 2016 Failure Investigation Report were derived from Plains's own data;
• Plains had received several other warning letters and notices of violations from the PHMSA in 2010, 2011, 2013, 2014, and 2016, about regulatory violations on its pipelines in other parts of the country;
• conclusions from the May 19, 2016 Failure Investigation Report detailing regulatory violations on Line 901;
• Plains did not perform adequate inspections or maintenance on its pipelines, had ineffective corrosion protection, did not have adequate leak-detection systems or monitoring, and did not adequately respond to the Line 901 spill, in violation of federal regulations;
• Plains's legal and regulatory compliance failures and pipeline-integrity deficiencies were allegedly reported to the individual defendants because of representations in Plains's Form 8-K underwriting agreements and Forms 10-K and 10-Q that Plains maintained disclosure controls and procedures designed to provide reasonable assurance that material information was “recorded, processed, summarized, and communicated” to Plains's officers;
• by virtue of Plains's audit committee's charter, the committee received notice of all potential or actual regulatory non-compliance that could “result in material non-compliance”; the committee in turn reported to the Board;
• two of the named defendants signed Sarbanes-Oxley Act certifications in Plains's Forms 10-K and 10-Q that “material information . . . [was] made known to [them] . . . .”;
• reports required by the Pipeline Inspection, Enforcement, and Safety (“PIPES”) Act “could not be compiled or verified without the underlying data Plains obtained through its ILIs and excavations of Lines 901 and 903 throughout the class period”; and
• statements in Plains's Code of Business Conduct emphasized a commitment to compliance with applicable laws and a requirement that material deviations from pipeline-safety and environmental-protection measures must be approved by two of four senior executive officers.

         The facts set out here are taken primarily from the Second Amended Consolidated Complaint, (Docket Entry No. 137).[2] The factual background pleaded in the earlier complaints, much of which is repeated in the Second Amended Complaint, is also set out in detail in the March 2017 Memorandum and Opinion. Op. at 3-21.

         Although the Second Amended Complaint alleges more specific facts about Plains's pre-spill regulatory violations, the Second Amended Complaint still does not allege a strong inference of scienter. The new scienter allegations are, again, based on the defendants' positions within the company and certifications they signed affirming that senior executives had reviewed reports containing material information. These allegations are not enough to establish a cogent and compelling inference of scienter. The motions to dismiss, (Docket Entries No. 140, 141), are granted. This third effort to replead does not cure the deficiencies. The claims are dismissed with prejudice and without leave to amend, because further amendment would be futile. The reasons for these rulings are explained in detail below.

         I. The Parties and the Plaintiffs' Causes of Action

         A. The Plaintiffs

         The plaintiffs are individuals and institutional investors who purchased equity and debt instruments issued by entities affiliated with Plains All American Pipeline, a major national oil and gas pipeline owner and operator. 2d Compl. ¶¶ 16-20. The named plaintiffs seek to represent a class of investors who purchased Plains All American Pipeline, LP common units between February 27, 2013 and August 5, 2015, or who purchased Plains GP Holdings, LP (“Plains Holdings”) Class A Shares between October 16, 2013 and August 5, 2015. The named plaintiffs also seek to represent individuals who purchased securities “pursuant and traceable to” the following public securities offerings:

• the Plains Holdings October 16, 2013 initial public offering of Class A shares (“IPO”);
• the Plains Holdings November 12, 2014 public offering of Class A shares (“Secondary Offering”);
• the Plains February 26, 2015 public offering of common shares (“Plains Offering”);
• the Plains August 8, 2013 public offering of 3.85% senior notes due 2023;
• the Plains April 15, 2014 public offering of 4.7% senior notes due 2044;
• the Plains September 2, 2014 public offering of 3.6% senior notes due 2024; and
• the Plains December 2, 2014 public offering of 2.6% senior notes due 2019 and 4.9% senior notes due 2045.

         Lead plaintiff IAM National Pension Fund is a defined-benefit pension plan for members of the International Association of Machinists and Aerospace Workers. IAM bought Plains and Plains Holdings securities on the open market during the class periods. Id. ¶ 16.

         Plaintiff City of Warren Police and Fire Retirement System is a defined-benefit governmental retirement system for police and firefighters in Warren, Michigan. It purchased 4.7% Plains notes in the April 2014 offering. Id. ¶ 17.

         Plaintiff Ming Liu is an individual who purchased Plains Holdings Class A shares in the October 2013 IPO. Id. ¶ 18.

         Plaintiff Jacksonville Police and Fire Pension Fund is a defined-benefit government retirement system for police and firefighters in Jacksonville, Florida. It purchased Plains Holdings Class A shares in the October 2013 IPO and the November 2014 Secondary Offering. Id. ¶ 19.

         Plaintiff Detroit Police and Fire Retirement System is a defined-benefit governmental retirement system for police and firefighters in Detroit, Michigan. It purchased Plains Holdings Class A shares in the November 2014 Secondary Offering and Plains common units in the February 2015 Plains Offering. Id. ¶ 20.

         There is no allegation that the named plaintiffs purchased notes in or traceable to the August 2013 senior-notes offering, the September 2014 senior-notes offering, or the two December 2014 senior-notes offerings.

         B. The Defendants

         1. The Plains Defendants

         a. The Corporate Defendants

         Plains All American Pipeline, LP (“Plains”), is a publicly traded Delaware master limited partnership that owns and operates oil and gas pipelines throughout the United States. Id. ¶ 21. A general partner, Plains All American GP LLC (“GP LLC”), manages Plains and employs Plains's officers, directors, managers, and U.S.-based employees. Id. ¶ 22. GP LLC, in turn, is wholly controlled by Plains GP Holdings, LP (“Plains Holdings”), a publicly traded Delaware limited partnership. Id. ¶ 24. Plains Holdings is, in turn, managed by PAA GP Holdings LLC (“Holdings LLC”), which owns the general partner interest in Plains Holdings and directs that entity's activities. Id. ¶ 29. Plains itself wholly owns PAA Finance Corp., a Delaware corporation formed in 2001 to co-issue Plains's debt securities. Id. ¶ 28. Each entity is a named defendant.

         b. The Individual Defendants

         i. The Officer Defendants

         Greg L. Armstrong is the CEO and Chairman of the Board of GP LLC, Plains's general partner, Holdings LLC (Plains Holdings's general partner), and PAA Finance. Id. ¶ 30. Armstrong signed the securities-offering materials at issue and many of the SEC filings alleged to contain false and misleading statements. He also made allegedly false or misleading statements at investor meetings. Id.

         Chris Herbold is the Vice President - Accounting and Chief Accounting Officer of GP LLC, PAA Finance, and Holdings LLC. Id. ¶ 31. He signed the registration statements for some of the securities offerings, as well as the SEC filings that contained allegedly misleading statements. Id.

         Richard McGee is the Executive Vice-President, General Counsel, and Secretary of GP LLC and Holdings LLC. Id. ¶ 32. He signed the SEC filings that contained allegedly false and misleading statements. Id.

         Harry Pefanis is the President and Chief Operating Officer of GP LLC and Holdings LLC, and President of PAA finance. Id. ¶ 33. Pefanis signed the registration statement for some of the securities offerings and other SEC filings that contained allegedly false or misleading statements. Id.

         Al Swanson is the Executive Vice-President and Chief Financial Officer of GP LLC, PAA Finance, and Holdings LLC. Id. ¶ 34. Swanson signed the allegedly misleading registration statements and SEC filings. Id.

         ii. The Director Defendants

         In addition to the Officer defendants, the plaintiffs sued the following members of the board of directors: Victor Burk, Everardo Goyanes, Gary Petersen, John Raymond, Bobby Shackouls, Robert Sinnott, Vicky Sutil, J. Taft Symonds, and Christopher Temple. These defendants were directors of various Plains entities for at least part of the relevant period, and each signed securities-offering materials containing allegedly untrue or misleading statements. Id. ¶¶ 36-44.

         2. The Underwriter Defendants

         The plaintiffs also sued financial institutions that participated in at least one Plains securities offering in which the registration statement or other offering materials contained allegedly false or misleading statements. Id. ¶¶ 45-81. Different Underwriter defendants allegedly participated in each of the securities offerings at issue.[3]

         C. The Causes of Action

         The plaintiffs' Second Amended Complains asserts claims under:

• § 10(b) of the Exchange Act and Rule 10b-5 against Plains, Plains Holdings, and the Officer defendants;
• § 20(a) of the Exchange Act against Holdings LLC, Plains Holdings, and the Officer defendants;
• § 11 of the Securities Act against all defendants;
• § 12(a)(2) of the Securities Act against the Underwriter defendants; and
• § 15 of the Securities Act against Holdings LLC, Plains Holdings, the Officer defendants, and the Director defendants.

         For the Exchange Act claims under § 10(b)/Rule 10b-5 and § 20(a), the plaintiffs seek to represent a class of those purchasing Plains common units between February 27, 2013 and August 5, 2015, and those purchasing Plains Holdings Class A shares between October 16, 2013 and August 5, 2015.

         For the Securities Act claims under §§ 11, 12, and 15, the plaintiffs seek to represent a class of those purchasing securities “pursuant and traceable to” these offerings. Id. ¶¶ 1-2. The court's earlier Memorandum and Opinion dismissed the claims related to the August 2013 senior-notes offering, the September 2014 senior-notes offering, and the two December 2014 senior-notes offerings because the plaintiffs did not have standing. Op. at 97. The Second Amended Complaint includes allegations about these offerings only “to preserve all rights related to claims arising out of those offerings.” 2d Compl. ¶ 2, n.1.

         II. The Second Amended Consolidated Complaint's Factual Allegations

         For purposes of this motion to dismiss, the allegations in the Second Amended Consolidated are taken as true except to the extent that they are contradicted by the narrow category of documents the court may consider on a motion to dismiss without converting it into one for summary judgment.

         A. The Allegations as to Plains's Operations

         Plains All American Pipeline is a publicly traded MLP. Its business is interstate and intrastate crude-oil pipeline transportation and storage. Before and during the class period, Plains was one of North America's largest energy pipeline operators. It grew primarily by acquiring significant pipeline and terminal networks. 2d Compl. ¶ 87. The assets acquired included Lines 901 and 903, built in 1987 and acquired by Plains in 1998. Line 901 extends approximately 10 miles along the California coast, where it connects to Line 903, which continues 128 miles through Santa Barbara County and into Kern County. Id. ¶ 88.

         Plains conducted periodic inspections of the pipeline with internal inspection devices called pipeline-inspection gauges, or “smart pigs.” Smart pigs are run inside a pipeline to detect anomalies caused by corrosion, cracks, laminations, dents, or other defects. These runs are called in-line inspections. Plains's third-party in-line-inspection vendor, Rosen, conducted in-line inspections on Line 901 in June 2007, July 2012, and May 5, 2017. Id. ¶ 89.

         Plains's pipeline operations are controlled remotely from a center in Midland, Texas that is operated and staffed at all times. The center “continuously monitors all of Plains's liquid product movements” and “maintains system integrity through leak detection.” Id. ¶ 90. The center monitors and operates over 850 remote sites. Id.

         During the class period, most of the Plains pipelines, including Lines 901 and 903, were under the regulatory jurisdiction of the Pipeline and Hazardous Materials Safety Administration. The PHMSA enforces regulations under the Hazardous Liquids Pipeline Safety Act of 1979. Id. ¶ 91. Federal regulations enacted under the Act, referred to in this opinion as the “Pipeline Safety Act, ” required Plains to “adopt measures designed to reduce the environmental impact of oil discharges from onshore pipelines, including the maintenance of comprehensive spill response plans and the performance of extensive spill response training for pipeline personnel.” Id. 2002 and 2006 amendments to the Pipeline Safety Act required Plains to “implement integrity management programs, including more frequent inspections, correction of identified anomalies and other measures to ensure pipeline safety in ‘high consequence areas, ' such as high population areas, areas unusually sensitive to environmental damage, and commercially navigable waterways.” Id. ¶ 92. PHMSA regulations also required Plains to implement enhanced measures in high-consequence areas. Id.

         Lines 901 and 903 were in a high-consequence area because they were close to the environmentally sensitive Santa Barbara coastline, rivers, state parks, and national forests. The plaintiffs allege that, during the class period, Lines 901 and 903 comprised 9 to 10 percent of Plains's interstate crude-oil pipelines in high-consequence areas, and 15 to 18 percent of Plains's pipelines affecting commercially navigable waters and sensitive ecological resources. Id. Plains had to comply with the PHMSA's enhanced high-consequence-area requirements for Lines 901 and 903. Id. Plains was also generally, and specifically for Lines 901 and 903, subject to the Federal Water Pollution Control Act, referred to as the “Clean Water Act, ” as amended. That Act imposes restrictions on the discharge of pollutants, like crude oil, into navigable waters of the United States, as well as into state waters. Id. ¶ 93.

         Plains publicly stated throughout the class period that it was in substantial compliance with these laws and regulations. Plains also stated that it had implemented pipeline maintenance and integrity measures “beyond regulatory mandate.” Id. ¶ 95. The plaintiffs allege that Plains knew that both statements were false when they were made.

         B. Plains's Pre-Class Period Actions and the EPA Consent Decree

         Plains and its related companies reported 229 safety and maintenance “incidents” on pipelines to federal regulators, more than all but three other reporting companies. These incidents resulted in more than $141 million in property damage and the release of more than 800, 000 gallons of hazardous liquids. Id. ¶ 96.

         The EPA sued Plains in 2010 and obtained a consent decree requiring Plains to pay significant fines for regulatory violations, and to adopt new safety measures to prevent spills and reduce the impact when they did occur. Id. ¶ 97. The consent decree required Plains to take steps that included the following: to spend $41 million to upgrade more than 10, 000 miles of pipeline; to conduct weekly aerial patrols of certain pipelines to check for leaks; to spend millions to mitigate leak threats from corrosion; to install computational pipeline-monitoring capabilities; and to conduct ongoing monitoring of its pipeline system. Id. ¶ 98. None of the $41 million was spent on upgrading or repairing Lines 901 or 903. Id. The plaintiffs repeatedly allege that the consent decree specifically required Plains to repair, upgrade, monitor, and take other similar actions on Lines 901 and 903. The consent decree is a public document central to the plaintiffs' complaint, so the court may consider it on this motion to dismiss.

         The defendants insist that the consent decree does not support the plaintiffs' characterization. The consent decree is discussed in detail later in this opinion. For now, it suffices to note that while the decree did include Lines 901 and 903 on a lengthy list of lines subject to certain requirements, it did not require Plains to make specific expenditures or take specific steps on Lines 901 or 903. And, as the defendants emphasize, the United States and Plains jointly terminated the consent decree in 2013. See Docket Entry No. 20, United States v. Plains All American Pipeline, LP, 4:10-cv-2833 (S.D. Tex. Nov. 26, 2013).

         C. Plains's Statements About Its Pipeline Integrity

         In the wake of the consent decree, Plains executives issued statements telling investors that it had adopted enhanced measures to ensure pipeline integrity. Id. ¶ 99. The Plains 2012 Form 10-K, filed the first day of the class period, reassured investors that “pipeline integrity management” was Plains's “primary operational emphasis, ” and that Plains had “implemented programs intended to maintain the integrity of our assets, with a focus on risk reduction through testing, enhanced corrosion control, leak detection, and damage prevention.” Id. The Form 10-K stated that the Plains “pipelines are in substantial compliance with [applicable regulations]” and that Plains's “integrity management program” included measures that went beyond legal requirements. Id.

         At a 2014 investor day conference, Plains CEO Greg Armstrong stated that “[s]afety is a core value” and that Plains “foster[s] a culture that emphasizes operational excellence, asset integrity, & safety.” Id. ¶ 100. The top three items in Armstrong's presentation were “Safety, ” “Pipeline Integrity Management, ” and “Incident Response Preparation.” Id. Armstrong assured investors that “[w]e are committed to operational excellence in safety, pipeline integrity management, and responding to incidents in the unfortunate development that they do occur.” Id. Armstrong also stated that “we do a lot and I mean a tremendous amount that will never be appreciated by the public” on safety and spill prevention. Id. Armstrong acknowledged that safety and environmental compliance may “in the short-term hurt our performance in terms of relative to EBITDA targets, etc., ” but stated that notwithstanding this effect, “in all cases we want to make sure we do the right thing.” Id.

         The Officer defendants made several statements, which the plaintiffs say were false and misleading, about Plains's pipeline integrity-management program and Plains's investments in complying with regulations governing pipelines in high-consequence areas. These statements were:

(1) [t]he DOT regulations include requirements for the establishment of pipeline integrity management programs and for protections of ‘high consequence areas' where a pipeline leak or rupture could produce significant adverse consequences. We have also developed and implemented certain pipeline integrity measures that go beyond regulatory mandate.
(2) “[i]n that regard, we have implemented programs intended to maintain the integrity of our assets, with a focus on risk reduction through testing, enhanced corrosion control, leak detection, and damage prevention.” Id. ¶ 101.

         The plaintiffs contend that Plains reassured investors of its commitment to regulatory compliance in high-consequence areas, stating in its class-period Form 10-Ks that:

(1) Plains “devote[d] substantial resources to comply with [government]-mandated pipeline integrity rules . . . for protection of ‘high consequence areas' where a pipeline leak or rupture could produce significant adverse consequences”; and
(2) that Plains had complied with the Department of Transportation's requirements for high-consequence areas, including “more frequent inspections, correction of identified anomalies and other measures, to ensure pipeline safety in ‘high consequence areas, ' such as . . . commercially navigable waterways.” Id. ¶¶ 101-102.

         The plaintiffs argue that these statements apply “specifically - and exclusively” to all of Plains's pipelines running through high-consequence areas. Id. The defendants, in contrast, argue that the statements describe Plains's company-wide integrity-management plan and are not limited to, or focused on, pipelines in high-consequence areas. (Docket Entry No. 143 at 2-3). This dispute is discussed further below.

         Plains also represented that its officers were involved in the company's safety, pipeline-integrity, and incident-response work. 2d Compl. ¶ 105. During the class period, Plains's website asserted that its Environmental, Health, and Safety Program was “successful because it is developed, supported and carried out by our employees, from the senior management team down to the newest hire”; that “Plains All American is committed to public safety, protection of the environment and operation of our facilities in a prudent and safe manner”; and that the Plains entities “believe that all of our pipelines have been constructed and are maintained in all material respects in accordance with applicable federal, state and local laws and regulations, standards proscribed by the American Petroleum Institute and accepted industry practice.” Id.

         The plaintiffs contend that these statements would lead reasonable investors to believe that Plains's pipeline integrity-management program, specifically as applied to Lines 901 and 901, fully complied with all applicable regulations. Id. ¶ 107. The plaintiffs contend that reasonable investors would not expect that Plains instead: (1) ignored “troubling warnings” from the PHMSA and Plains's own field measurements showing that the in-line inspection tool was inaccurate; (2) instructed its in-line-inspection vendor to ignore anomalies; (3) ignored inaccuracies in its repair decisions; (4) failed to properly repair or replace pipelines; (5) disregarded regulatory requirements and PHMSA notices and warnings to conduct preventive and mitigative evaluations; (6) ignored warnings that its corrosion-control program was ineffective; (7) ignored warnings about control-room violations; and (8) disregarded industry practices by failing to install automatic shutoff valves on Lines 901 and 903. Id.

         According to the Second Amended Complaint, Plains falsely assured investors that, when a leak was detected, the company would promptly respond, coordinate with public officials, and implement a comprehensive plan to prevent severe environmental impacts. Id. ¶ 109. The plaintiffs say that these promises of safe and effective pipeline operation were illusory. Instead, Plains had, and knew it had, disregarded its pipeline-integrity and maintenance obligations, with predictable results when a spill occurred in a high-consequence area. Id. ¶ 108.

         D. The Spill

         On May 19, 2015, Line 901 ruptured and spilled oil into the Pacific Ocean and environmentally sensitive coastal areas. The spill killed nearly 200 birds and more than 100 marine mammals, including dolphins and sea lions. Id. ¶ 110-112. At an investor day conference held shortly after the spill, Armstrong conceded that “[i]f you could pick any place in the world you would not want to have a release, [Santa Barbara] would probably qualify as the one.” Id. ¶ 112.

         Plains's response to the spill left much to be desired. State law required Plains to report the spill to the federal National Response Center within 30 minutes of detection. Instead, Plains did not report the spill to the National Response Center until hours after it was discovered. Id. ¶ 114. Plains's own response plans indicated that it should take no more than 15 minutes to discover a release and shut down the flow. Plains officials noticed anomalies in Line 901 by 10:30 a.m., but they did not shut the pipeline down until 11:30 a.m. Government officials first learned of the spill through a 911 call from beachgoers-not from Plains-at approximately 11:42 a.m. The local fire department notified the National Response Center of the spill at 12:43 p.m., over two hours before Plains itself notified the agency. Id.

         According to the plaintiffs, Plains's “spin operation” was far more effective than its on-the-ground response. Plains officials stated that the company's “worst case” estimate showed that, at most, 21, 100 gallons of oil had spread into the ocean, and as many as 105, 000 gallons had been released. Id. ¶ 115. On May 26, 2015, Plains filed a Form 8-K with the SEC. The Form 8-K described the spill and stated that Plains “currently estimates that the amount of released crude oil could be as high as approximately 2, 400 barrels, ” equivalent to 101, 000 gallons of oil; this represented a 4, 000 gallon reduction from the initial “worst case” estimate. Id. Plains allegedly waged a public-relations campaign to create the impression that it was working efficiently and effectively to remedy the spill, when it knew it had understated the extent of the spill and that it lacked the capability to respond effectively. Id. ¶¶ 116-117.

         E. Plains Reveals the Severity of the Spill

         On August 5, 2015, Plains disclosed in an investor presentation that as much as 143, 000 gallons of oil might have leaked, an amount 42 percent larger than previously reported. Id. ¶ 118. Plains also disclosed that both the U.S. Department of Justice and the California Attorney General were investigating the spill; Plains could be liable for criminal violations of the Clean Water Act; and Lines 901 and 903 were subject to multiple PHMSA corrective actions. Id. For the first time, according to the plaintiffs, Plains disclosed that the spill would cost the company $257 million-not including lost revenue associated with shutting down Lines 901 and 903-and that Plains's insurance did not cover all the costs. Id.

         During May and June, the defendants communicated regularly with investors and the public. The communications included the following:

• On June 4, 2015, defendants hosted an investor day, at which Armstrong discussed the Santa Barbara oil spill and encouraged investors to visit the Plains website for “daily updates” on the spill. Id. ¶ 365.
• On the website, in the “daily updates” section, Plains posted: (1) incident updates on June 29, 2015, July 6, 2013, and July 13, 2015; (2) “Recovery Q&As” on June 17, 2015; (3) the investor day presentation on June 4, 2015; and (4) Armstrong's letters to members of Congress on June 24, 2015. Id.
• The defendants and other Plains representatives had numerous conversations with the press about the spill between May 28, 2015 and August 5, 2015. Id. ¶ 372.

         The PHMSA had required Plains to have a spill-response plan for Lines 901 and 903. That plan, in place before the spill occurred, estimated the worst-case scenario for a spill from Line 901 at 148, 092 gallons, closer to the actual damage than to Plains's initially released estimates. Id. ¶ 368. The spill-response plan's risk analysis assumed “10 minutes total time to detect the rupture and 5 minutes to shutdown pipeline.” Id. But on the day of the spill, Plains employees did not shut down the rupture for more than two hours after it began. Id. The plaintiffs point to this delay as evidence of Plains's misrepresentations about its pipeline safety and spill-response capabilities.

         F. Plains's Maintenance Record

         i. The March 2009 PHMSA Notice of Amendment

         On March 4, 2009, the PHMSA issued a Notice of Amendment to Dan Nerbonne, Plains's Vice President of Engineering. The Notice stated that in 2008 and 2009 inspections of Lines 901 and 903, the PHMSA had identified more than 20 “apparent inadequacies found with Plains's plans or procedures.” These inadequacies included the following:

• Plains's data integration process failed to apply in-line-inspection tool uncertainty when comparing in-line-inspection results to the integrity management rule repair requirement, in violation of 49 C.F.R. § 195.452(f) and (g);
• Plains's Operations and Maintenance Manual did not provide guidance on “specific composite repairs methods that are approved for use” and did not provide procedures to follow when making repairs on corroded pipes, in violation of 49 C.F.R. § 195.585(a) and (b);
• Plains's integrity management program did not provide for the submission of “Safety Related Conditions Reports (SRCR)” to the PHMSA when “pressure reductions are taken for conditions” that meet the SRCR criteria, in violation of 49 C.F.R. § 195.55;
• Plains's Operation and Maintenance Manual on Corrosion Control did not provide “adequate details for employees to perform their maintenance activities safely, ” in violation of 49 C.F.R. § 195.402;
• Plains's “Aboveground Storage Tank Inspection, Repair, and Maintenance Specification [did] not address the hydrostatic test requirements of [industry standard] API 653 section 12.3, ” in violation of 49 C.F.R. § 195.307;
• Plains's Operations and Maintenance Manual did not provide procedures for pipeline coating inspection, in violation of 49 C.F.R. § 195.561;
• Plains's Operations and Maintenance Manual did not have procedures to monitor a Vapor Corrosion Inhibitor System used for breakout tanks and did not have an explanation as to why “the use of cathodic protection [was] not needed for the tank bottom protection, ” in violation of 49 C.F.R. 195.565;
• Plains did not have specific procedures on how it reviewed results of close internal surveys and performed quality checks “on performance of CIS and data collected to ensure that data actually is representative of what is occurring in the field, ” in violation of 49 C.F.R. § 195.573;
• Plains used an inadequate method of determining voltage drops in monitoring the adequacy of cathodic protection, and the section in its Operation and Maintenance Manual provided little guidance on how these drops would be considered, in violation of 59 C.F.R. § 195.573;
• Plains failed to record and include galvanic anodes in the cathodic protection process, and did not address “the practice of installing test points at all galvanic installations to allow on/off reading, ” in violation of 49 C.F.R. § 195.589; and
• Plains failed to comply with the coating standards for transition coating used in repairs, in violation of 49 C.F.R. 195.559.

Id. ¶ 119.

         ii. The December 2013 Warning Letter

         On December 24, 2013, the PHMSA sent a Warning Letter to Troy Valenzuela, Plains's Vice President of Environmental Health and Safety. The PHMSA, the Texas Railroad Commission, and the New Mexico Public Regulation Commission had inspected the Midland Control Room and found that Plains had “committed probable violations of the Pipeline Safety Regulations, Title 49, Code of Federal Regulations.” Id. ¶ 120. The probable violations all concerned control-room management. They included: (1) making changes “to the critical alarm type description and response priority” without following the Management of Change Procedures, in violation of 49 C.F.R. § 195.446(j); (2) providing no evidence of compliance with 49 C.F.R. § 195.446(j)'s requirement “to review the controller training program content” at least once a year to identify potential improvements to the training program; and (3) failures by Control Room personnel to completely fill out Abnormal Operations forms, in violation of 49 C.F.R. § 195.446(j). Id. ¶ 120.

         iii. The May 21, 2015 Corrective Action Order

         On May 21, 2015, the PHMSA issued a Corrective Action Order requiring Plains to take certain steps on Line 901. Id. ¶ 121. The May 21 Order noted that Plains's inspections of Line 901 in June 2007 and July 2012 had demonstrated declining pipeline integrity. Id. The May 21 Order noted that Plains had used a shrink-wrap sleeve coating on Line 901, which increases the likelihood of corrosion and of leaks. The May 21 Order required Plains to shut down Line 901, conduct extensive testing, review the company's emergency plans and training, and identify other shrink-wrapped parts of the line. Id. On June 3, 2015, the PHMSA issued an amended Corrective Action Order, which identified “extensive external corrosion” on Line 901 and “extensive corrosion” (among other deficiencies) on the adjoining Line 903. Id. ¶ 122.

         On September 11, 2015, the PHMSA issued a Notice of Probable Violation based on its September and October 2013 inspections of Lines 901 and 903. Id. ¶ 125. The Notice stated that Plains had likely violated regulations requiring it to keep records of its pipeline integrity-management efforts for lines in high-consequence areas, including records of required tests on Line 903. Id. ¶¶ 127-128. The Notice also stated that Plains did not have records of heightened prevention and mitigation efforts in other high-consequence areas and did not have records indicating what process it used to determine what measures it should take. Id. ΒΆ 129. The Notice stated that Plains could not produce ...

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