United States District Court, S.D. Texas, Houston Division
ROBERT EDGAR, Individually and on behalf of all others similarly situated, Plaintiff,
ANADARKO PETROLEUM CORPORATION, et al., Defendants.
ORDER GRANTING MOTION TO DISMISS, WITHOUT
ROSENTHAL CHIEF UNITED STATES DISTRICT JUDGE
plaintiffs, a class of investors who purchased or acquired
Anadarko common stock between February 8, 2016 and May 2,
2017, brought this securities class action against the
defendants, Anadarko Petroleum Corporation and several of its
executives. (Docket Entry No. 35). The plaintiffs
allege violations of § 10(b) of the Exchange Act and
Rule 10b-5 against Anadarko and violations of § 20(a) of
the Exchange Act against the executives. Id. at
¶¶ 38, 41. The defendants moved to dismiss, the
plaintiffs responded, and the defendants replied. (Docket
Entry Nos. 36, 46, 47). The parties appeared at a hearing on
June 15 and presented oral argument.
on the law, the record, and the parties' arguments, the
motion to dismiss is granted, without prejudice and with
leave to amend by August 3, 2018. The
reasons for this ruling are explained below.
The Factual Allegations
is a publicly traded oil and gas exploration and production
company headquartered in the Woodlands. (Docket Entry No. 35
at ¶ 27). Anadarko focuses its operations on the Gulf of
Mexico, the Delaware Basin in Texas, and the Denver-Julesburg
Basin in Colorado. Id. at ¶ 27. Approximately
one quarter of Anadarko's employees work out of its
Colorado offices. Id. at ¶ 3. The plaintiffs
allege that Anadarko's disregard for safety regulations
led to the endangerment and death of Colorado residents.
Id. at ¶¶ 1, 21. The plaintiffs contend
that this, and Anadarko's failure to be honest, harmed
investors and violated securities laws. The plaintiffs allege
the following facts.
2006, Anadarko acquired the oil and gas company, Kerr-McGee
Corporation. Id. at ¶ 58. This, combined with
Anadarko's acquisition of Western Gas Partners, LP,
substantially increased Anadarko's oil and gas interests
in the Denver-Julesburg Basin. Id. at ¶ 59. By
the end of 2006, this region accounted for 38% of
Anadarko's proved onshore oil and gas reserves in the
lower 48 states. Id.
accrued $9 billion in environmental fines and settlements
between 2011 and 2014. Id. at ¶ 4. The
liabilities came primarily from the Macondo well explosion
and the Kerr-McGee acquisition. Id. Anadarko paid
what was the largest environmental settlement in United
States history for the environmental damage Kerr-McGee had
caused. Id. If not for these fines and settlements,
Anadarko would have enjoyed multi-billion dollar profits
between 2011 to 2013. Id. at ¶ 5. Instead,
Anadarko lost one billion dollars. Id.
October 21, 2013, Anadarko and its closest competitor engaged
in a land swap in the Wattenberg field, the most actively
drilled part of the Denver-Julesburg Basin, located just
north of Denver. Id. at ¶¶ 61, 77.
Anadarko received about 1, 500 existing wells in the swap.
Id. at ¶¶ 77-80. The land surrounding the
wells was primarily rural when the wells were drilled. As
Denver expanded, the surrounding land became more
residential. Id. at ¶ 80. The wells, most of
which were drilled 30 to 40 years ago, were not in compliance
with Colorado's standards. Id. at ¶ 84.
They lacked methane emission controls to prevent gas from
being vented into residential airspace. Id. Other
issues included outdated piping and oil storage tanks and
deteriorated cellars and cement pits intended to prevent
liquids from going into the ground or groundwater.
Id. Anadarko's top management knew about these
problems within six months after the land swap and were
regularly presented with an up-to-date list of wells
determined to be problematic by Anadarko's Colorado
health, safety, and environment division. Id. at
end of 2015, Anadarko operated approximately 5, 000 vertical
wells and 1, 000 horizontal wells in the Wattenberg
field. Id. at ¶¶ 64-65.
Drilling in the Wattenberg field accounted for 30.1% of
Anadarko's worldwide oil production and 20.7% of its
worldwide natural gas production. Id. at ¶ 65.
assured investors that it had turned over a new leaf in
regulation compliance. Id. at ¶ 6. Anadarko
told investors that it had the ability to monitor all the
wells in the Colorado region and could rapidly identify and
address safety issues. Id. After making these
assurances, Anadarko discovered that several hundred wells
acquired in the land swap were safety and environmental
hazards and would require remediation. Id. at ¶
7. Anadarko authorized tens of millions of dollars for
prices dropped from $95.83 a barrel on September 1, 2014 to
$54.56 a barrel on January 1, 2015. Id. at ¶
73. Anadarko reversed course on its commitment and slashed
its remediation budget before any substantial remediation had
been performed. Id. at ¶ 9. Senior Colorado
Anadarko executives were aware of the safety issues, but they
acted to support Anadarko's bottom line by laying off 20%
to 30% of the workforce in March 2016. Id. at
¶¶ 10-11. Included in the layoffs were 30% of the
field operations personnel who were responsible for well
remediation, as well as 30% of the company's health,
safety, and environmental division. Id. at ¶
95. There were not enough employees to operate the
Denver-Julesburg Basin safely. Id. at ¶ 12.
2016 and early 2017, Anadarko “ramped up” its
activity in Colorado. Id. at ¶ 97. In August
2016, Anadarko had one well-drilling rig in Colorado.
Id. By November 2016, it had five. Id.
Despite this increased drilling, Anadarko hired no additional
employees. Id. One former employee brought up the
inadequate staffing with John Christiansen, Anadarko's
vice-president of corporate communications, approximately 12
times between late 2016 and March 2017. Id. at
¶ 99. She also brought her concerns to Craig Walters,
vice-president of the Denver-Julesburg Basin; Shane Fross, an
engineer; and Paul Schneider, the health, safety, and
environment manager for the Denver-Julesburg Basin.
Id. at ¶ 99. When another former employee found
out that many of Anadarko's contractors did not comply
with safety regulations, he sent an email to the contractors
and “everyone and their brother” within Anadarko,
but he received no responses. Id. at ¶ 101.
Anadarko continued to hire the infringing contractors.
determined that a 28, 000-gallon oil spill in January 2017
was caused by the lack of trained personnel. Id. at
¶ 12. At an internal meeting to prepare for a hearing
before the Colorado Oil and Gas Conservation Commission to
discuss the spill, Anadarko officials noted that the cause of
the accident was a lack of “skilled staff.”
Id. at ¶ 103. Anadarko executives decided not
to inform Colorado regulators of the cause of the spill.
Id. Fross instructed meeting attendants not to admit
that cause to during the Commission hearing. Id. at
¶ 102. When a senior public-relations employee voiced
concerns about Anadarko's lack of skilled staff and
safety practices, Christiansen told her to “keep
quiet” and that her job was to “shovel shit and
clean up the messes that [Anadarko's employees]
make.” Id. at ¶ 104.
used its remediation budget to support production and avoid
fines. Id. at ¶ 105. Anadarko chose the wells
to remediate based on the amount of oil they would produce or
when failing to remediate would affect Anadarko's
drilling schedule. Id. at ¶ 106. When Anadarko
drilled new horizontal wells, it would:
[C]ross-reference the location against the location of the
lease-maintaining assets. Anadarko would then perform
mechanical integrity tests on [an] older well to ensure they
could withstand the pressure of the nearby horizontal frack.
If the old well did not pass these tests, Anadarko would plug
and abandon the well to install a new horizontal well. In
that way, Anadarko used the remediation budget to ensure
“the machine of the horizontal drilling program did not
get slowed down, ” rather than to address the actual
health and safety risks of the wells.
Id. at ¶ 107. Only when it faced potential
fines for methane emissions did Anadarko use funds in the
remediation budget to remediate the high-emitting wells.
Id. at ¶¶ 108-09.
risks and proximity to residential areas or schools were not
factors considered in remediation. Id. at ¶
105. According to one former employee, well remediation had
“nothing to do with the probability of the wells, or
flowlines, creating environmental or safety hazards. The
company prioritized either the decommissioning of a well, the
upgrade or a repair of the well, based on where the drilling
schedule was.” Id. at ¶ 110.
Colorado-based upper executives met several times to talk
about how to prioritize using remediation funds to support
drilling rather than to address environmental and safety
hazards. Id. at ¶ 111. At group leadership
meetings, Korby Bracken, the director of environment,
regularly raised health and safety concerns. Id. at
¶ 113. His concerns were pushed aside. Id. at
April 17, 2017, a home in Firestone, Colorado exploded,
killing two people and critically injuring another.
Id. at ¶ 14. The home was 200 feet away from
the Anadarko-operated Firestone Well. Id. at ¶
127. The well was one of the several hundred acquired in the
land swap but was never remediated. Id. at ¶
15. On April 26, 2017, Anadarko announced that the Firestone
Well may have been involved in the explosion, and that the
company would be shutting down 3, 000 similar wells in
Colorado. Id. at ¶ 16. Anadarko's stock
price fell 4.7% the next day. Id. at ¶ 17.
had turned on the Firestone Well, in January 2017 to maintain
the lease. Id. at ¶ 121. The well did not emit
methane when it was turned on because it did not have a
compressor to dispose methane. Id. at ¶¶
122. In early April 2017, Anadarko had sent crews to the
Firestone Well. Id. at ¶ 123. Though the crews
could not explain why the well was not emitting methane,
Anadarko did not shut off the well. Id. Because
Anadarko was short-staffed, it did not check to make sure the
Firestone Well's flowlines were not
leaking. Id. at ¶ 125. It did not
know about the existence of the leaking line that caused the
2, 2017, the Firestone-Frederick Fire Department confirmed
the link between Anadarko's well and the Firestone
explosion. Id. at ¶ 18. A return line that was
connected to the Firestone Well leaked methane into the
home's drains, which exploded when a hot-water heater was
being installed. Id. at ¶ 129. Anadarko
violated Colorado Oil and Gas Conservation Commission Rule
1103 by abandoning the flowline without disconnecting and
sealing it. Id. at ¶¶ 18, 129. On May 3,
2017, Anadarko's stock price fell by 7.7%. Id.
at ¶ 19. On June 30, 2017, Anadarko announced that it
had cut and sealed more than 2, 400 abandoned flowlines
located within 1, 000 feet of buildings, each of which
violated Rule 1103. Id. at ¶ 138. Anadarko
additionally disconnected, plugged, and abandoned 3, 600
return lines. Id.
publicly expressed sympathy in a published statement
attributed to its Robert Walker, Anadarko's chief
executive officer, but its executives admitted internally
that they were not worried about the explosion. Id.
at ¶¶ 20, 132. At the next Anadarko town hall
meeting, the Firestone explosion came up only when Walker
mentioned that Anadarko was “not too concerned”
about it. Id. at ¶ 133.
24, 2017, a new methane cloud was discovered west of the
Firestone explosion site, with even higher levels of methane.
Id. at ¶ 136. The following day, a fire at an
Anadarko oil container in Weld County, Colorado killed one
worker and injured three others. Id. at ¶ 137.
The False Statement Allegations
February 2016 and 2017, Anadarko published its 2016 and 2017
Health, Safety, and Environment Fact Sheets. Id. at
¶ 140, 153. The documents stated: “[w]e work to
ensure that all of our activities are conducted to meet or
surpass applicable health, safety, and environmental laws,
regulations, and international standards.” Id.
The 2016 Fact Sheet additionally stated: “our [health,
safety, and environment] team works seamlessly with
operations and facilities to ensure compliance with all
applicable laws and regulations.” Id. at
¶ 140. The plaintiffs argue that these statements were
false because: “(a) Anadarko intentionally violated
Colorado law and regulations as a matter of course, including
Rule 1103; and (b) Anadarko knew that hundreds of the wells
it had acquired in the Land Swap did not comply with a
variety of Colorado laws and regulations, including those
violations leading to the Firestone Well explosion.”
Id. at ¶ 141, 154.
February 16, 2016, Anadarko filed its 2015 Form 10-K, which
Walker and Robert Gwin, Anadarko's executive
vice-president of finance and chief financial officer,
signed. Id. at ¶ 143. The 2015 Form 10-K
Anadarko's business operations are subject to numerous
international, provincial, federal, regional, state, tribal,
local, and foreign environmental and occupational health and
safety laws and regulations. . . .
Many states where the Company operates also have, or are
developing, similar environmental laws and regulations
governing many of these same types of activities. In
addition, many foreign countries where the Company is
conducting business also have, or may be developing,
regulatory initiatives or analogous controls that regulate
Anadarko's environmental-related activities. While the
legal requirements imposed under state or foreign law may be
similar in form to U.S. laws and regulations, in some cases
the actual implementation of these requirements may impose
additional, or more stringent, conditions or controls that
can significantly alter or delay the permitting, development
or expansion of a project or substantially increase the cost
of doing business. In addition, environmental laws and
regulations, including new or amended legal requirements that
may arise in the future to address potential environmental
concerns such as air and water impacts, are expected to
continue to have an increasing impact on the Company's
operations. . . .
The Company believes that it is in material compliance with
existing environmental and occupational health and safety
regulations. Further, the Company believes that the cost of
maintaining compliance with these existing laws and
regulations will not have a material adverse effect on its
business, financial condition, results of operations, or cash
flows, but new or more stringently applied existing laws and
regulations could increase the cost of doing business, and
such increases could be material.
Id. at ¶¶ 143-44. The plaintiffs allege
that the statement, “the Company believes that it is in
material compliance with existing environmental and
occupational health and safety regulations, ” was false
because: “(a) Anadarko intentionally violated Colorado
law and regulations as a matter of course, including Rule
1103; and (b) Anadarko knew that hundreds of the wells it had
acquired in the Land Swap did not comply with a variety of
Colorado laws and regulations.” Id. at ¶
August 12, 2016, Anadarko filed a Registration Statement on
Form S-3, which incorporated the 2015 Form 10-K by reference.
Id. at ¶ 152. On September 12, 2016, Anadarko
sold 40, 537, 500 shares at an offering price of 54.50 per
share, its largest stock offering by dollar amount.
Id. The offering raised net proceeds of $2.2
published a Wattenberg Integrated Operations Center Factsheet
on its website. The Factsheet stated that the Operations
Center “[p]rovides real-time remote-monitoring
capabilities for 6, 800 wells and 3, 700 tank facilities,
” and that it “applies state of the art oil,
natural gas, and water management to Anadarko tank batteries,
facilities and pipeline infrastructure.” Id.
at ¶ 146. It also stated that Anadarko
“[i]mmediately pinpoints issues associated with field
alerts and alarms.” Id. at ¶ 146. The
plaintiffs allege that these statements were false because:
“(a) a large proportion of Anadarko's facilities
and pipeline infrastructure was not state of the art, but old
and decaying; and (b) the Operations Center could not
pinpoint issues or provide real-time monitoring consistently
because Anadarko did not know where many of its lines in
Colorado were located.” Id. at ¶ 147.
March 2016 and 2017, Anadarko published its Health, Safety,
Environmental and Sustainability Overviews for 2015 and 2016
on its website. Id. at ¶¶ 148, 156. The
reports, which Walker and David McBride, Anadarko's
vice-president of global health, safety, and environment
Oil and natural gas upstream and midstream operations are
subject to laws and regulations in every country in which
Anadarko operates. Anadarko operates its global onshore and
offshore operations in compliance with the applicable laws
and associated regulations. . . .
Anadarko is committed to preventing and minimizing the
impacts of spills [at all operations/everywhere it operates].
This commitment is demonstrated by the implementation of best
management practices, engineering design, mechanical
integrity, product assessment and training. Anadarko promotes
a culture that allows for employee involvement in maintaining
a safe work environment while recognizing that environmental
incidents are preventable. The teams strive for ZERO
incidents. Spills can be prevented by designing and operating
equipment and training staff to avoid releases.
Id. at ¶¶ 148-50, 156-58. The plaintiffs
challenge two statements: (1) “Anadarko operates its
global onshore and offshore operations in compliance with the
applicable laws and associated regulations”; and (2)
“[t]he teams strive for ZERO incidents. We believe
spills can be prevented by designing and operating equipment
and training staff to avoid releases.” The plaintiffs
allege that the statements were false because: “(a)
Anadarko intentionally violated Colorado law and regulations
as a matter of course, including Rule 1103; and (b) Anadarko
knew that hundreds of the wells it had acquired in the Land
Swap were not in compliance with a variety of Colorado laws
and regulations.” Id. at ¶¶ 151,
159. The plaintiffs also allege that Anadarko knew that it
did not have enough employees to prevent Colorado spills and
that instead of hiring employees, it allowed spills when the
costs of clean up were cheaper than remediation. Id.
The Legal Allegations
plaintiffs assert that Anadarko violated Section 10(b) of the
Exchange Act, 15 U.S.C. § 78j(b) and the Security
Exchange Commission's Rule 10b-5. Id. at ¶
170. The plaintiffs assert that the executive committee
defendants, Bradley Holly, Craig Walters, and John
Christiansen, violated Section 20(a) of the Exchange Act, 15
U.S.C. § 78t(a). Id. at ¶ 182.
The Legal Standards