Parker v. Hyperdynamics Corporation et al

Filing 84

OPINION AND ORDER denying 57 Defendant's Motion to Consolidate and granting 78 Defendant's Motion to Dismiss. (Signed by Judge Melinda Harmon) Parties notified.(rhawkins)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
CLINTON PARKER, et al,

§
§
Plaintiffs,
§
VS.
§
§
HYPERDYNAMICS CORPORATION, et al, §
§
Defendants.
§

CIVIL ACTION NO. 4:12-CV-999

OPINION AND ORDER
Pending before the Court is Lead Plaintiff Richard Cuneo’s Motion to Consolidate (Doc.
57) and Motion to Dismiss. Doc. 78. Having considered the motion, response, reply, the facts in
the record, and the applicable law, the Court concludes the Motion to Consolidate (Doc. 57)
should be denied and the Motion to Dismiss (Doc. 78) should be granted.
I.

Motion to Consolidate
A.

Background

The pending Motion to Consolidate involves three civil actions in the Southern District of
Texas against the same defendants. The first-filed case (Parker Action), No. 4:12-cv-999, is
pending before the undersigned judge, and the later-filed cases, No. 4:14-cv-641 (Germani
Action) and No. 4:14-cv-649 (Stahelin Action), are pending before Judge Sim Lake. The Lead
Plaintiff in the Parker Action, Richard Cuneo, moves to have the actions consolidated in this
Court, designating the first-filed Parker Action as the lead case. The motion is opposed by
Robert McLarty, Dorothy LaRose, and Howell Poole, Jr. (collectively, the “HDY Investor
Group” or “HDY”), who filed on the same day as the pending motion a motion to consolidate the
Germani and Stahelin Actions in Judge Lake’s court. No. 4:14-cv-641, Doc. 4. HDY

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alternatively seeks appointment as Co-Lead Plaintiffs were this Court to consolidate all three
Actions. Doc. 65.
On April 2, 2012, Plaintiff Clinton Parker, individually and on behalf of all persons who
acquired the stock of Hyperdynamics Corporation between February 17, 2011 and February 15,
2012, filed the Parker Action against Defendants Hyperdynamics Corporation and its CEO Ray
Leonard. Doc. 1. Parker alleges Defendants issued materially false and misleading statements
resulting in artificially inflated stock prices. Specifically, Parker alleges Defendants
Hyperdynamics and Leonard concealed the fact that the company would be unable to commence
drilling its Baraka-1 well due to cost overruns and delays in drilling its Sabu-1 well. Doc. 1 ¶ 12.
Parker cites 21 public statements during the class period either stating the second well was
planned or omitting mention of it. Doc. 1 ¶¶ 25–50. On December 5, 2013, after two previous
Lead Plaintiffs withdrew, Richard Cuneo was appointed Lead Plaintiff. Doc. 51. 43
On September 20, 2013 and again on February 7, 2014, Hyperdynamics disclosed it had
been served with subpoenas pursuant to a Federal Corrupt Practices Act (FCPA) investigation.
On March 13, 2014, Dennis Dale Germani, individually and on behalf of all persons who
acquired the stock of Hyperdynamics Corporation between November 8, 2012 and March 11,
2014, filed the Germani Action against Defendants Hyperdynamics Corporation, Ray Leonard,
Paul C. Reinbolt, and David Wesson. No. 4:14-cv-641, Doc. 1. Germani alleges Defendants
issued materially false and misleading statements resulting in artificially inflated stock prices.
Specifically, Germani alleges Defendants concealed the fact that the company lacked adequate
controls and violated the FCPA. No. 4:14-cv-641, Doc. 1 ¶ 34. Germani cites 9 public statements
during the class period referring to the company’s drilling concession and failing to disclose that
the concession was obtained through violation of the FCPA. No. 4:14-cv-641, Doc. 1 ¶¶ 19–36.
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On March 14, 2014, one day later, Benjamin Stahelin filed an identical complaint. No. 4:14-cv641, Doc. 1.
On March 26, 2014, pursuant to the Joint Motion for Scheduling Order, the Court ordered
Cuneo to file an Amended Complaint. Doc. 55. On May 12, 2014, Cuneo filed the pending
Motion to Consolidate and an Amended Complaint encompassing several elements of the
Germani and Stahelin complaints: the class period was extended from September 29, 2009 to
March 11, 2014; Defendants Paul Reinbolt and David Wesson, former Chief Financial Officers
of Hyperdynamics, were added; and FCPA-related allegations were added. Docs. 56, 57. Also on
May 12, 2014, the HDY Investor Group filed a Motion to Consolidate the Germani and Stahelin
Actions in Judge Lake’s court. No. 4:14-cv-641, Doc. 4. On June 16, 2014, Judge Lake
postponed a scheduling conference until both Motions to Consolidate were resolved and ordered
a new scheduling order within 30 days of the resolution should the matter remain in his court.
No. 4:14-cv-649, Doc. 24.
B.

Legal Standard

Federal Rule of Civil Procedure 42(a) grants trial courts discretionary authority to
consolidate cases that “involve a common question of law or fact.” The Fifth Circuit has urged
district judges “to make good use of Rule 42(a) in order to expedite . . . trial and eliminate
unnecessary repetition and confusion,” even when opposed by the parties. In re Air Crash
Disaster at Fla. Everglades on Dec. 29, 1972, 549 F.2d 1006, 1013 (5th Cir. 1977) (quoting
Gentry v. Smith, 487 F.2d 571, 581 (5th Cir. 1973)) (citations omitted). Consolidation is
permitted “as a matter of convenience and economy in administration,” Shafer v. Army & Air
Force Exch. Serv., 376 F.3d 386, 394 (5th Cir. 2004) (quoting Johnson v. Manhattan Ry. Co.,
289 U.S. 479, 496 (1933)) (citations omitted), though not “if it would prejudice the rights of the
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parties.” St. Bernard Gen. Hosp., Inc. v. Hosp. Serv. Ass’n of New Orleans, Inc., 712 F.2d 978,
989 (5th Cir. 1983); see Frazier v. Garrison I.S.D., 980 F.2d 1514, 1531 (5th Cir. 1993) (listing
factors: (1) same court, (2) common parties, (3) common questions of law or fact, (4) risk of
prejudice or confusion versus risk of inconsistent adjudications, (5) judicial economy); cf. Mills
v. Beech Aircraft Corp., Inc., 886 F.2d 758, 762 (5th Cir. 1989) (denying consolidation where
first-filed action “was ready for trial” and the later-filed action was not); St. Bernard, 712 F.2d at
990 (same).
C.

Discussion

Applying the consolidation factors from Frazier, all three Actions were (1) filed in the
same district, (2) against the same defendants on behalf of overlapping classes of shareholders,
(3) asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act. 980 F.2d at
1531. In regard to the third factor, the parties dispute whether the Actions present common
questions of law or fact beyond the broad language of Section 10(b) and SEC Rule 10b-5. The
alleged violations all involve “false and misleading statements regarding the Company’s
business and financial results.” Doc. 1 ¶ 3; Doc. 56 ¶ 45 (“statements made by Defendants
misrepresented and/or omitted material facts about the business, operations, and financial
condition of Hyperdynamics”); No. 4:14-cv-641, Doc. 4 ¶ 6 (“false and/or misleading statements
. . . about the Company’s business, operations, and prospects”); No. 4:14-cv-649, Doc. 1 ¶ 6
(same). In the Germani and Stahelin Actions, however, the alleged false and misleading
statements concern only FCPA violations.
Specifically, Defendants made false and/or misleading statements and/or failed to
disclose that: (1) the Company obtained and retained oil and gas concession rights
in violation of the U.S. Foreign Corrupt Practices Act and/or U.S. anti-money
laundering statutes; (2) the Company lacked adequate internal and financial
controls; and (3) as a result of the foregoing, the Company’s statements were
materially false and misleading at all relevant times.
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No. 4:14-cv-641, Doc. 4 ¶ 6; see also No. 4:14-cv-649, Doc. 1 ¶ 6 (same). By contrast, the
original Complaint in the Parker Action alleges only statements and omissions about budgetary
shortfalls and logistical bottlenecks in Hyperdynamics’s drilling program. Doc. 1 ¶¶ 25–50. The
Amended Complaint combines both types of statements. Doc. ¶¶ 246–426. HDY argues false or
misleading statements about FCPA violations and statements about budgetary and logistical
problems present distinct questions of law or fact. In response, Cuneo cites a New York federal
court opinion broadly stating: “differences in causes of action, defendants, or the class period do
not render consolidation inappropriate if the cases present sufficiently common questions of fact
and law, and the differences do not outweigh the interests of judicial economy served by
consolidation.” Kaplan v. Gelfond, 240 F.R.D. 88, 91 (S.D.N.Y. 2007). In Kaplan, the court
consolidated actions with different class period starting dates but with a “common pattern in their
allegations: that defendants’ statements to the investing public misrepresented or omitted to state
material facts about the financial status of [defendants].” Id.; see also Lloyd v. Indus. Bio-Test
Labs., Inc., 454 F. Supp. 807, 812 (S.D.N.Y. 1978) (consolidating actions based on identical
public statements regarding FDA approval of a drug); Miller v. Ventro Corp., 01-CV-1287, 2001
WL 34497752, at *1 (N.D. Cal. Nov. 28, 2001) (consolidating actions based on identical
earnings reports, with overlapping class periods, defendants, and causes of action); In re Cendant
Corp. Litig., 182 F.R.D. 476, 478 (D.N.J. 1998) (consolidating actions based on sequential
disclosures of accounting irregularities over different putative class periods); Dees v. Colonial
BancGroup, Inc., CIV A 2:09CV112-MHT, 2009 WL 1033258, at *1 (M.D. Ala. Apr. 17, 2009)
(consolidating “short-class” actions with “long-class” actions based on additional public
disclosures, where “major action in both cases took place during the same period of time”).
Cuneo also cites two cases involving complex multidistrict litigation, where consolidated actions
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included somewhat different types of fraud. First, in litigation involving Enron Corporation, this
Court consolidated numerous actions involving false financial reports, insider trading, and
various other claims as a preliminary matter, noting that “consolidation for pretrial matters does
not necessarily mean that the claims will all be tried together, especially where the nature of the
evidence and damages issues differ substantially.” In re Enron Corp. Sec. Litig.206 F.R.D. 427,
438 (S.D. Tex. 2002). The Court explained, “it is centrally important to the litigants on both
sides and to this Court, especially because there are so many parties involved and all are entitled
to equal access to the evidence, that the discovery process not disintegrate into chaos and
harassment.” Id. at 451. In a more recent opinion, a court consolidated thirty cases arising from
the initial public offering of Facebook, Inc. The cases involved two types of claims: false
statements in prospectuses under Section 11 and unlawful trading by underwriters under Section
10(b), the latter requiring proof of scienter. In re Facebook, Inc., IPO Sec. and Derivative Litig.,
288 F.R.D. 26, 26 (S.D.N.Y. 2012). The court noted judges in the Southern District of New York
“have routinely consolidated Securities Act and Exchange Act claims.” Id. at 36. The court
generalized the claims of Facebook shareholders as seeking relief “on behalf of similar classes,
asserted against some of the same defendants, arising out of the same series of events” under
“federal securities laws.” Id. at 35; see also In re MicroStrategy Inc. Sec. Litig., 110 F. Supp. 2d
427, 431 (E.D. Va. 2000) (consolidating actions based on the same “central claim” of
misrepresented revenues, though one action included a claim of insider trading, which the court
found was “no obstacle to consolidation as it is clear that the . . . claims are inextricably
intertwined, as allegations of insider trading are typically used to buttress an inference of the
defendants’ scienter”); Blackmoss Invs., Inc. v. ACA Capital Holdings, Inc., 252 F.R.D. 188, 190
(S.D.N.Y.2008) (Securities Act and Exchange Act claims are “well-suited for consolidation.”).
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Here, Cuneo offers no authority for consolidating FCPA-related claims with ordinary
securities fraud claims. Although the FCPA-related claims in the Germani and Stahelin Actions
rely on fraudulent SEC filings under Section 10(b) as do the claims in the original Parker
complaint, the FCPA-related claims involve a different type of wrongdoing under a separate
statutory framework with different legal and ethical considerations for the factfinder.
Furthermore, the history of Hyperdynamics’s stock price reveals FCPA disclosures resulted in
distinct losses to purchasers. During the original class period in Parker, Hyperdynamics’s stock
declined steadily from “around $4-5 per share” to $1.44 but increased during the amended period
to above $6 per share, before crashing to $2.19 as a result of FCPA-related disclosures. Doc. 63
at 3. As for Cuneo’s own losses, his original loss chart only shows purchases prior to the
corrective disclosures about FCPA subpoenas, raising doubts about whether he even has standing
to represent FCPA-related claims. Doc. 70-2. Cuneo responds that HDY represents an
aggregation of unrelated plaintiffs with lesser financial interest in the litigation. Doc. 69 at 15.
An amended loss chart filed with Cuneo’s amended complaint, however, shows he purchased
additional stock after the first FCPA disclosure but sold it all prior to the second FCPA
disclosure. Doc. 70-6 at 8. See Dura Pharma., Inc. v. Broudo, 544 U.S. 336, 342 (2005)
(holding a plaintiff did not have standing to show loss causation where he completely sold out of
a security by the time the operative corrective disclosure was made); In re Flag Telecom
Holdings, Ltd. Sec. Litig., 574 F.3d 29, 38-40 (2nd Cir. 2009) (“in-and-out” plaintiff could not
conceivably prove loss causation). In addition, notice of the Parker Action was only given to
shareholders purchasing stock between February 17, 2011 and February 15, 2012, more than a
year before the first FCPA disclosure and without any reference to FCPA compliance. Cuneo
responds that later purchasers affected by FCPA disclosures have been adequately notified and
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represented, arguing “[t]o be sure, the notice discussed the drilling of Sabu-1 and the impact of
delays and increased cost estimates on the drilling of Baraka-1, but it did so in the context of
conduct taken to comply with the PSC (i.e., the retention of Concession).” Doc. 69 at 8 n.10. The
notice itself says nothing about conduct taken to retain the Concession, much less violations of
the FCPA. Doc. 18-1.
HDY and Cuneo present conflicting authority from other districts on whether Cuneo may
be subject to unique defenses as a “high-volume,” “high-frequency,” or “day” trader. Cuneo’s
325 trades over three years do not appear to raise unique defenses merely on the basis of
frequency. See, e.g., In re Royal Ahold N.V. Sec. & ERISA Litig., 219 F.R.D. 343, 354 (D. Md.
2003) (appointing day trader as lead plaintiff and observing that “where false information and
misleading omissions pollute the market, all types of investors are injured”). The question
remains whether he relied on any of the FCPA-related omissions and would vigorously litigate a
claim based on them.
In regard to the fourth and fifth Frazier factors, inconsistent adjudication and judicial
economy, Cuneo and HDY appear to agree it would be preferable to coordinate the Actions in
one court. A footnote in HDY’s response, ostensibly in opposition to consolidation, supports
consolidation so long as HDY is named Lead Plaintiff:
Ultimately, some degree of coordination between the Parker Action and the FCPA
Actions is inevitable and necessary. All three above-captioned actions could be
consolidated into a single action or the Parker Action and FCPA Actions could be
coordinated with each other. Regardless, under either scenario, Cuneo is not an
appropriate lead plaintiff for the reasons discussed herein. If the Court does not
consolidate the FCPA Actions with the Parker Action, it likely makes sense for
either the FCPA Actions or the Parker Action to be transferred and all actions to
proceed before a single judge, either Judge Harmon or Judge Werlein.
Doc. 65 at 3 n.2 (emphasis added). Cuneo maintains if the Actions are not consolidated
Defendants “will be forced to file essentially the same motion papers . . . repeatedly produce the
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same documents, respond to multiple sets of interrogatories and defend and take duplicative
depositions,” not to mention duplication of judicial workload. Doc. 64 at 5. Defendants,
however, do not complain about this increased burden in their response, ambiguously stating
they do not oppose consolidation, as it would appropriately address their right to a single
adjudication, but it may “dilut[e] the focus of the matter” and result in premature dismissal. Doc.
63 at 3. Defendants note, “the original Parker action had essentially nothing to do with the
allegations or the time periods pleaded in the Germani and Stahelin cases.” Doc. 63 at 2.
Subsequent to filing their Motion to Dismiss the Amended Complaint, Defendants submitted a
Further Statement Regarding Consolidation, suggesting the Court may not deny the Motion to
Consolidate since “both sets of claims were fully briefed in the Motion to Dismiss” pursuant to
the Court’s scheduling order. Doc. 79 at 3. Defendants provide no authority for this suggestion,
aside from an inapposite statement in Enron regarding the Court’s ongoing power to evaluate
lead plaintiffs. Unlike in Enron, there is no sign of immanent “chaos and harassment against
defendants” which would require preliminary consolidation of such distinct actions. 206 F.R.D.
at 451.
II.

Motion to Dismiss
A.

Legal Standards

1.

Rule 12(b)(6)

“To survive a motion to dismiss, a complaint must contain sufficient factual matter,
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)). Factual
matter is limited to “documents attached to or incorporated in the complaint and matters of

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which judicial notice may be taken.” U.S. ex rel. Willard v. Humana Health Plan of Texas Inc.,
336 F.3d 375, 379 (5th Cir. 2003).
2.

Rule 9(b)

Securities fraud claims must also satisfy the heightened pleading standard set out in
Federal Rule of Civil Procedure 9(b): “In alleging fraud or mistake, a party must state with
particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and
other conditions of a person’s mind may be alleged generally.” The Fifth Circuit interprets Rule
9(b) to require “specificity as to the statements (or omissions) considered to be fraudulent, the
speaker, when and why the statements were made, and an explanation of why they were
fraudulent.” Plotkin v. IP Axess, Inc., 407 F.3d 690, 696 (5th Cir. 2005) (citing Williams v. WMX
Technologies, Inc., 112 F.3d 175, 177–78 (5th Cir.1997), cert. denied, 522 U.S. 966 (1997)).
3.

PSLRA

The Private Securities Litigation Reform Act of 1995 (PLSRA), which codified the
judicially implied private securities fraud action under Section 10b-5, incorporates the
requirement stated above under Rule 9(b) and common law that the plaintiff state with
particularity each alleged fraudulent statement. 15 U.S.C. § 78u-4; see ABC Arbitrage Plaintiffs
Group v. Tchuruk, 291 F.3d 336, 350 (5th Cir. 2002) (“The effect of the PSLRA in this respect is
to, at a minimum, incorporate the standard for pleading fraud under Fed. R. Civ. P. 9(b),”
including the “who, what, when, where, and how” of each alleged fraudulent statement.). The
PLSRA provides two additional requirements: (1) “if an allegation regarding the statement or
omission is made on information and belief, the complaint shall state with particularity all facts
on which that belief is formed”; (2) “the complaint shall . . . state with particularity facts giving

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rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. §
78u-4.
4.

Rule 10b-5

Section 10(b) of the Securities Exchange Act prohibits employment of manipulative and
deceptive devices in connection with the purchase or sale of securities. 15 U.S.C. § 78j(b); 17
C.F.R. § 240.l0b-5 (defining employment of manipulative and deceptive devices to include
making “any untrue statement of a material fact or to omit to state a material fact necessary in
order to make the statements made, in the light of the circumstances under which they were
made, not misleading”). The Supreme Court has interpreted Rule 10b-5 to provide a private
action with the following elements, subject to the particularity requirements of the PSLRA: “(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.” Stoneridge Inv.
Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157 (2008).
a.

Materiality

“A fact is material if there is ‘a substantial likelihood that, under all the circumstances,
the omitted fact would have assumed actual significance in the deliberations of the reasonable
shareholder.’” Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 362 (5th Cir.
2004) (citation omitted); see Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988) (materiality is
based on the “‘total mix’ of information made available” to the shareholder). Statements of
material fact do not include puffery and certain forward-looking statements. Puffery includes
“generalized, positive statements about the company’s competitive strengths.” Rosenzweig v.
Azurix Corp., 332 F.3d 854, 869 (5th Cir. 2003) (holding positive press release was not
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actionable where “plaintiffs have not alleged that any of the historical representations in that
press release were false”). The Exchange Act safe harbor excludes liability for any forwardlooking statement that is “identified as a forward-looking statement, and is accompanied by
meaningful cautionary statements identifying important factors that could cause actual results to
differ materially from those in the forward-looking statement.” 15 U.S.C. § 78u-5. Meaningful
cautionary statements do not include boilerplate disclaimers but include “specific, concrete
explanations that clearly identified and quantified the clearly present financial dangers.”
Lormand v. US Unwired, Inc., 565 F.3d 228, 247 (5th Cir. 2009). Cautionary statements outside
of identified forward-looking statements may limit materiality under the “bespeaks caution”
doctrine. Rubinstein v. Collins, 20 F.3d 160, 167-68 (5th Cir. 1994) (explaining “the ‘bespeaks
caution’ doctrine merely reflects the unremarkable proposition that statements must be analyzed
in context” or “within the ‘total mix of information’”). Overly general disclaimers may
themselves be a form of fraud. See Huddleston v. Herman & MacLean, 640 F.2d 534, 544 (5th
Cir. 1981) “[T]o caution that it is only possible for the unfavorable events to happen when they
have already occurred is deceit.”).
In the case of fraud by omission, an additional element closely related to materiality is the
duty to disclose omitted facts. Rule 10b-5 does not create a duty to disclose in the absence of
prior statements rendering the omission misleading. 17 C.F.R. § 240.10b-5 (“It shall be unlawful
. . . [t]o omit to state a material fact necessary in order to make the statements made, in the light
of the circumstances under which they were made, not misleading.”); Basic, 485 U.S. at 239 n.17
(“Silence, absent a duty to disclose, is not misleading under Rule 10b–5.”).

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b.

Scienter

Scienter, or the “mental state embracing an intent to deceive, manipulate, or defraud,”
includes both knowledge and severe recklessness. Broad v. Rockwell Int’l Corp., 642 F.2d 929,
961 (5th Cir. 1981). Severe recklessness is limited to statements that (1) involve an extreme
departure from the standards of ordinary care, and (2) present a danger of misleading buyers or
sellers which is either known to the defendant or is so obvious that the defendant must have been
aware of it. Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1021 (5th Cir. 1996). Under the
PSLRA, scienter must be pleaded with particular facts that support a “strong inference” that the
defendant acted with knowledge or severe recklessness. 15 U.S.C. § 78u-4. To find a strong
inference, the court must first consider “plausible nonculpable explanations for the defendant’s
conduct, as well as inferences favoring the plaintiff,” although a strong inference “need not be
irrefutable, i.e., of the smoking-gun genre, or even the most plausible of competing inferences.”
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). Allegations of motive
and opportunity may “meaningfully enhance the strength of the inference” but are not sufficient
alone. Ind. Elec. Workers’ Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527, 533
(5th Cir. 2008) (quoting Nathenson v. Zonagen Inc., 267 F.3d 400, 412 (5th Cir. 2001)).
c.

Connection with purchase or sale

The remaining four elements of a 10b-5 action require proof of proximate causation of
the shareholder’s injury. Plaintiffs must first prove “a connection between the misrepresentation
or omission and the purchase or sale of a security.” Stoneridge, 552 U.S. at 157. This element
tracks Section 10(b) of the Exchange Act. 15 U.S.C.A. § 78j (prohibiting fraud “in connection
with the purchase or sale of any security”). The statutory requirement has three parts: (1) a
“connection” between the fraudulent statement or omission and (2) “purchase or sale” of a (3)
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“security.” In a suit brought by purchasers of stock on a securities exchange, only the first part is
in dispute. The Fifth Circuit determines the sufficiency of the connection according to the liberal
“touch” test, requiring only that the fraud touch or have some discernable connection to the
purchase or sale. Alley v. Miramon, 614 F.2d 1372, 1378 (5th Cir. 1980); see Superintendent of
Ins. of State of N. Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 12 (1971) (“in connection”
provision “must be read flexibly, not technically and restrictively”). In other words, the fraud
must somehow affect the value of a security. Bissell v. Merrill Lynch & Co., Inc., 937 F. Supp.
237, 242 (S.D.N.Y. 1996), aff’d, 157 F.3d 138 (2d Cir. 1998) (“[U]nless the alleged fraud
concerns the value of the securities bought or sold, or the consideration received in return, such
fraud is not “in connection with” the purchase or sale of a security within the meaning of Rule
10b–5.”).
d.

Reliance

Fourth, plaintiffs must prove “reliance upon the misrepresentation or omission” or
“transaction causation.” Dura, 544 U.S. at 341. Again, this element requires a “causal connection
between a defendant’s misrepresentation and a plaintiff’s injury.” Basic, 485 U.S. at 243. This
element goes beyond the “in connection” element by requiring the plaintiff to show the fraud
influenced the shareholder’s evaluation of the stock. A plaintiff may prove reliance directly by
showing “he was aware of a company’s statement and engaged in a relevant transaction.” Erica
P. John Fund, Inc. v. Halliburton Co., ___ U.S. ___, 131 S. Ct. 2179, 2184 (2011). There is a
rebuttable presumption of reliance where the plaintiff demonstrates “that the alleged
misrepresentations were publicly known (else how would the market take them into account?),
that the stock traded in an efficient manner, and that the relevant transaction took place ‘between
the time the misrepresentation were made and the time the truth was revealed.’” Id. at 2185
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(citation omitted). The defendant may rebut the presumption by showing “that the alleged
misrepresentation did not, for whatever reason, actually affect the market price, or that a plaintiff
would have bought or sold the stock even had he been aware that the stock’s price was tainted by
fraud, then the presumption of reliance would not apply.” Halliburton Co. v. Erica P. John Fund,
Inc. (Halliburton II), ___ U.S. ___, 134 S. Ct. 2398, 2408 (2014).
e.

Economic loss

Fifth, plaintiffs must prove the fraud caused actual economic loss, for instance by proving
securities were sold at a lower price. Cf. Gebhardt v. ConAgra Foods, Inc., 335 F.3d 824, 831-32
(8th Cir. 2003) (“However, stockholders can be damaged in ways other than seeing their stocks
decline. If a stock does not appreciate as it would have absent the fraudulent conduct, investors
have suffered a harm.”).
f.

Loss causation

Sixth, plaintiffs must prove loss causation. This element is specifically provided in the
PSLRA. 15 U.S.C. § 78u-4 (“In any private action arising under this chapter, the plaintiff shall
have the burden of proving that the act or omission of the defendant alleged to violate this
chapter caused the loss for which the plaintiff seeks to recover damages.”). This element goes
beyond economic loss by requiring Plaintiffs to connect each loss to the value of the security in
the absence of fraud. This can be shown by: “(1) identifying a ‘corrective disclosure’ (a release
of information that reveals to the market the pertinent truth that was previously concealed or
obscured by the company’s fraud); (2) showing that the stock price dropped soon after the
corrective disclosure; and (3) eliminating other possible explanations for this price drop, so that
the factfinder can infer that it is more probable than not that it was the corrective disclosure—as
opposed to other possible depressive factors—that caused at least a ‘substantial’ amount of price
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drop.” Pub. Employees Ret. Sys. of Mississippi, Puerto Rico Teachers Ret. Sys. v. Amedisys, Inc.,
769 F.3d 313, 320-21 (5th Cir. 2014). The corrective disclosure may include a “series of partial
disclosures.” Lormand, 565 F.3d at 261. Other possible depressive factors may include “changed
economic circumstances, changed investor expectations, new industry-specific or firm-specific
facts, conditions, or other events.” Dura, 544 U.S. at 343.
B.

Discussion

Plaintiffs’ 167-page Amended Complaint cites 49 public statements made by Defendants
between September 30, 2009 and May 5, 2014.1 In regard to Plaintiffs’ FCPA-related claims, the
first sixteen statements in the Amended Complaint, dated September 30, 2009 to February 14,
2011, in addition to nine statements dated March 29, 2011 to September 11, 2013, consist of
general risk disclosures in SEC filings referring to corruption. See, e.g., Doc. 56 ¶ 246 (“We
operate in Guinea, a country where corrupt behavior exists that could impair our ability to do
business in the future or result in significant fines or penalties.”). Plaintiffs argue these
statements contain omissions, rather than disclosures, of FCPA violations that Defendants knew
had occurred. Plaintiffs cite three corrective disclosures about the FCPA investigation, dated
September 30, 2013, March 12, 2014, and May 5, 2014.
In regard to the non-FCPA-related claims, Defendants cite thirteen statements dated
February 17, 2011 to May 13, 2011 referring to Hyperdynamics’s “two well” drilling program,
statements which Plaintiffs argue imply the first well was on track and the second well was still
feasible. Plaintiffs cite eight partial corrective disclosures dated December 14, 2011 to February
1

The three other complaints in the Actions cite an additional 12 statements. The original Parker complaint cites five
press releases and one public conference statement not cited in the Amended Complaint, consisting of general
progress reports on the Sabu-1 well; the statements are dated April 7, 2011 to January 30, 2012, during which period
Defendants made more relevant statements cited in the Amended Complaint that expressly refer to the two-well
program. Doc. 1. The Germani and Stahelin complaints each cite six SEC filings not cited in the Parker complaints,
dated November 8, 2012 to February 7, 2014, consisting of redundant or irrelevant statements about
Hyperdynamics’s ownership stake in the Concession. No. 4:14-cv-641, Doc. 1; No. 4:14-cv-641, Doc. 4.

16 / 37

15, 2012 that acknowledge delays. Plaintiffs cite two corrective disclosures dated May 9 and 10,
2012, announcing a write-off of the drilling program. Plaintiffs also cite four statements about
corporate matters which do not appear to have any connection to Plaintiffs’ claims.
1.

FCPA-related Statements

Defendants issued twenty statements disclosing a risk of FCPA violations before they
disclosed the FCPA subpoenas. See, e.g. Doc. 56 ¶ 246 (citing September 30, 2009 Form 10-K)
(“We operate in Guinea, a country where corrupt behavior exists that could impair our ability to
do business in the future or result in significant fines or penalties.”). Seven of the statements
further revealed Hyperdynamics had found “control deficiencies” in its accounting practices in
2009. See, e.g., Doc. 56 ¶ 251 (citing November 12, 2009 prospectus supplement) (“Some of the
identified internal control deficiencies contributing to our material weaknesses in financial
reporting relate to our operations in Guinea. These material weaknesses make it more likely that
[an FCPA] violation could have occurred.”). The control deficiencies are not identified in the
record. Defendants state: “Hyperdynamics had historically had some difficulties—mainly during
the period before the management and board were largely replaced beginning around 2009—
maintaining adequate internal controls.” Doc. 78 at 15. Four of the statements specifically deny
violations of the FCPA. See, e.g., Doc. 56 ¶ 268 (citing April 20, 2010 Form 8-K) (“Neither the
Company, nor any of its Subsidiaries, nor, to the Knowledge of the Company, any director,
officer, agent, employee or other Person acting on behalf of the Company or any of its
Subsidiaries, has, in the course of its actions for, or on behalf of, the Company, violated or is in
violation of any provision of the [FCPA].”).
Defendants do not contend the statements above were adequate disclosures of FCPArelated risks. Defendants tentatively argue: “Plaintiff never meaningfully addresses the
17 / 37

Company’s risk disclosure language, including its disclosure beginning in 2009 that certain
internal control weaknesses ‘make it more likely that a[n] [FCPA] violation could have
occurred.’” Doc. 82 at 22–23. Defendants maintain FCPA violations did not occur.
Plaintiffs respond that the disclosures were false or misleading by omission, because
violations occurred. Plaintiffs have not, however, established that FCPA violations occurred. The
only authoritative evidence in the record that FCPA violations occurred is Hyperdynamics’s
disclosure of subpoena requests by the DOJ in September 2013 and the SEC in January 2014.
Doc. 56 ¶¶ 421, 423. On March 12, 2014, Hyperdynamics’s partner Tullow Guinea Limited
declared these subpoenas a force majeure event but retracted the declaration in May 2014. Doc.
56 ¶¶ 425, 426. These disclosures do not establish that FCPA violations occurred or that
Defendants knowingly omitted FCPA violations. See Konkol v. Diebold, Inc., 590 F.3d 390, 402
(6th Cir. 2009) (“The mere existence of an SEC investigation does not suggest that any of the
allegedly false statements were actually false . . . [,] nor does it add an inference of scienter.”
(quoting In re Hutchinson Tech., Inc. Secs. Litig., 536 F.3d 952, 962 (8th Cir. 2008))).
Defendants cannot be held liable for not preempting the SEC process and issuing a public
confession. See City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173,
184 (2d Cir. 2014) (rejecting argument that “in addition to disclosing the existence of an
investigation, defendants were required to disclose that [defendant] UBS was, in fact, engaged in
an ongoing tax evasion scheme,” because “disclosure is not a rite of confession”).
The question remains whether Plaintiffs have pleaded fraudulent omissions of facts
foreseeably giving rise to FCPA investigations resulting in losses to shareholders. In addressing
this question, the Court first must determine whether Plaintiffs have pleaded omissions rendering
prior FCPA-related statements “in the light of the circumstances under which they were made,
18 / 37

not misleading.” 17 C.F.R. § 240.10b-5. The Court must then determine whether the omissions
plausibly satisfy all the elements of fraud set forth in Stoneridge, including materiality, scienter,
and causation of artificially high stock prices and losses to shareholders after the subpoenas were
announced. If Plaintiffs have not pleaded omissions rendering prior statements misleading, Rule
10b-5 does not apply. Pontiac, 752 F.3d at 184 (quoting Ciresi v. Citicorp, 782 F.Supp. 819, 823
(S.D.N.Y. 1991), aff’d, 956 F.2d 1161 (2d Cir. 1992) (holding “companies do not have a duty to
disclose ‘uncharged, unadjudicated wrongdoing.’”); In re Par Pharm. Cos., Inc. Sec. Litig., 733
F. Supp. 668, 674-75 (S.D.N.Y. 1990) (holding an issuer is “under no duty to announce publicly
that it or its officers are guilty of uncharged criminal behavior, or to accuse itself of antisocial or
illegal policies”). Here, four of the FCPA-related statements specifically deny violations of the
FCPA. The other sixteen FCPA-related statements disclose a general risk of FCPA violations;
seven of these statements also disclose a specific risk arising from control deficiencies. As
explained below, Plaintiffs have not alleged FCPA-related facts which would render either the
sixteen risk disclosures or the four specific denials misleading by omission and which
Defendants had a duty to disclose. Furthermore, Plaintiffs have failed to allege facts which
would render the specific denials false or misleading.
The FCPA prohibits a company from making an “offer, gift, promise to give, or
authorization of the giving of anything of value” to a “foreign official for purposes of . . .
influencing any act or decision of such foreign official in his official capacity” in obtaining
business. 15 U.S.C § 78dd-1. This prohibition does not bar a company from giving anything of
value to a foreign government, as opposed to a foreign official personally, or to a third party such
as a nonprofit in order to generate corporate goodwill, even if the gift indirectly influences
government officials. See DOJ and SEC, A Resource Guide to the U.S. Foreign Corrupt
19 / 37

Practices Act (Nov. 14, 2012) (“The FCPA does not prohibit charitable contributions or prevent
corporations from acting as good corporate citizens.”). Nor does it prohibit misappropriation by a
foreign official without the company’s knowledge. 15 U.S.C § 78dd-1 (“corrupt” intent required
by the FCPA); see H.R. Rep. No. 95-640, at 7 (“The word ‘corruptly’ is used in order to make
clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse
his official position.”).
Here, Plaintiffs have alleged Defendants made donations to the government of Guinea
during three phases of negotiations over Hyperdynamics’s concession. Plaintiffs claim these
donations constituted bribery under the FCPA. The first donation occurred after Hyperdynamics
received a letter in 2005 indicating the government had cancelled its concession. Defendants met
with the Secretary General of Guinea at the Presidential Palace and were told the letter was a
“fake” but that further review was necessary. Doc. 56 ¶ 78. On August 1, 2006, Defendant CEO
Kent Watts founded a nonprofit organization called American Friends of Guinea for the purpose
of making charitable contributions “for the welfare of the Guinean population.” Doc. 56 ¶ 81.
Shortly thereafter, on September 22, 2006, the government approved the first renegotiated
concession. Doc. 56 ¶ 82.
The second instance of alleged bribery occurred during negotiations from late 2007 to
2009, after the renegotiated concession became a local news story and the government again
threatened to cancel it. In September 2007, a delegation led by the Secretary General visited
Hyperdynamics’s office in Houston, and vice versa. Over the next year, American Friends of
Guinea “delivered and paid for antibiotics and glucose fluids for men, women, and children who
were stricken with cholera and quarantined as a result thereof. AFG also planned new water well
projects to get to the source of solving the problem.” Doc. 56 ¶ 92. In addition, Plaintiffs cite an
20 / 37

investor forum, www.investorvillage.com, which cites an article from a Guinean news website,
www.guinee24.com, stating the Minister Secretary General “disbursed by means of
[H]yperdynamics, the sum of five hundred (500) million Guinean francs, which were distributed
to some of Ioubards [hooligans] Municipality of Kaloum and other districts in the capital of
Guinea. Ioubards [were seen] in the streets two days before the fateful day of the strike of
January 10, 2008. . . .” Doc. 56 ¶ 98. Plaintiffs allege the “hooligans” supported the President
and organized street protests against the Prime Minister. Doc. 56 ¶ 97. On February 8, 2008,
according to a Wikileaks cable,2 Hyperdynamics CFO Briers met with the U.S. Embassy. The
cable states, “Briers raised the issue of FCPA violations” by the Company during the meeting,
and did so “without prompting.” Doc. 56 ¶ 103. Briers denied the Company paid the 500 million
Guinea francs to the reported hooligans. Briers also denied Hyperdynamics had paid the
Secretary General “to push through their contract.” Plaintiffs argue, “Despite Briers’ denials of
specific instances of alleged bribery, his voluntary whistleblowing of FCPA violations further
reinforced the Embassy’s view that Hyperdynamics was violating the act.” Id. The cable explains
the Embassy declined Brier’s request for assistance in negotiating with the government on
grounds that “commercial advocacy would be very difficult, if not impossible, due to the fact
that the [U.S. Government] does not recognize the military junta as a legitimate government.”
Doc. 56 ¶ 123. According to another Wikileaks cable, Tidiane Diallo, a new employee of the
Ministry of Mines who formerly worked at USAID told the Embassy, “I am sure Hyperdynamics
was the minister’s ticket for his appointment.” Doc. 56 ¶ 110. According to the cable, Diallo
2

Defendants argue the Wikileaks cable is quoted “without explanation of how the source learned the information in
question, much less whether the veracity of the information was ever determined.” Doc. 78 at 39. Plaintiffs do not
provide authority for authenticating or taking judicial notice of Wikileaks cables. See James P. Kelly, Jr., Wikileaks:
A Guide for American Law Librarians, 104 Law Libr. J. 245, 261 (2012) (“Whether WikiLeaks would qualify as
such a reliable source [of which a court may take judicial notice] has yet to be judicially determined.”).

21 / 37

based his statement on the fact that “the minister was appointed on August 27 . . . and that
Hyperdynamics was at the ministry the very next day. The company’s contract was reinstated a
few days later.” Id. Diallo also claimed Hyperdynamics had offered to donate $56 million to the
government to pay its annual bill for power plant fuel.3 Doc. 56 ¶ 111. The cable states:
Diallo reportedly warned the minister of mines to reject the offer, pointing out
that it is not clear what Hyperdynamics wants in return, and accepting a
“donation” at this point would undermine the [government’s] future bargaining
power. He said that the [government] has not yet decided whether or not to accept
the funds, but that the ministers of mines and finance may decide to do so because
of significant budgetary pressures.
Doc. 56 ¶ 111. The embassy officer asked Diallo directly if the donation was a bribe, and Diallo
responded, “yes and no.” Diallo explained, “[O]n the one hand, the offer is public and no one is
trying to negotiate a deal behind closed doors. At the same time, the fact that the [government]
does not know what Hyperdynamics wants in return raises questions about the company’s
intent.” Doc. 56 ¶ 112. Again, Defendants’ negotiations bore fruit. On September 11, 2009, a
Memorandum of Understanding was signed, partially affirming and modifying Hyperdynamics’s
concession. Doc. 56 ¶ 124. On September 29, 2009, Hyperdynamics made a donation to
American Friends of Guinea of stock. On the same day, a director of Hyperdynamics resigned,
following the firing of the CEO and resignation of the CFO and another director during the
summer of 2009. Doc. 56 ¶¶ 125–126. The concession was approved by presidential decree in
May 2010. Doc. 56 ¶ 65.
The third instance of alleged bribery occurred in 2011, after the concession was again
disputed by the transitional government and modified by way of a mining code promulgated in

3

A U.S. State Department report titled “2010 Investment Climate Statement – Guinea” describes the use of ad hoc
taxes or “donations” by the government of Guinea to support government services. For instance, the President held a
compulsory meeting in June 2010 announcing that all foreign businesses were obligated to pay a donation for
electrical and water infrastructure. Afterwards, “many of the businesses were visited and threatened by military
officials until they paid the ‘donation.’” Doc. 56 ¶ 117.

22 / 37

September 2011. Doc. 56 ¶ 132. Plaintiffs cite testimony from confidential witness CW-1, a
former Logistics Operations Manager for Hyperdynamics, alleging Hyperdynamics donated and
installed $20,000 of computer equipment4 for the Ministry of Mines in 2011 and $8,000 to
$10,000 of computer equipment for the Guinean Offshore Department of Environment, “an
agency that the Company helped to create from scratch.”5 Doc. 56 ¶¶ 133, 135. Plaintiffs do not
specify any particular official action influenced by the computer donations. Plaintiffs also fail to
plead donations to the government and the American Friends of Guinea constituted gifts to a
“foreign official for purposes of . . . influencing any act or decision of such foreign official in his
official capacity.” 15 U.S.C § 78dd-1 (emphasis added).
In sum, Plaintiffs’ FCPA-related fraud claims are based on speculations of uncharged,
unadjudicated FCPA violations that are not plausibly material.
2.

Statements Related to Drilling Plans and Financial Shortfalls

Plaintiffs cite thirteen statements by Defendants mentioning Hyperdynamics’s “two well”
drilling program, in spite of Defendants’ alleged knowledge that a second well would not be
drilled. Defendants argue the statements about the second well were immaterial, and even if the
statements were material, Defendants lacked scienter.
The first eleven statements, dated February 17, 2011 to October 13, 2011, state without
qualification Defendants planned to drill two wells. Six of these statements expressly describe
the second well in terms of plans or goals. Doc. 56 ¶ 316 (citing March 31, 2010 Form 10-Q)
(“We plan to drill two exploratory wells.”); Doc. 56 ¶ 299 (citing February 17, 2011 statement
by Defendant Leonard at Annual Meeting) (“[O]ur goal is to begin drilling the first of at least
two wells near the end of the year.”); Doc. 56 ¶ 325 (citing July 15, 2011) (“We are anticipating
4

Prior to obtaining its concession in Guinea, Hyperdynamics was a value added reseller of computer hardware and
software in Houston, Texas. Doc. 56 ¶ 69.
5
It is not clear whether the alleged $20,000 donation included the $8,000 to $10,000 donation.

23 / 37

the drilling of the Sabu-1 and Baraka-1 exploration wells in the shallow water portion of the
block in the fourth quarter of this year.”); Doc. 56 ¶ 332 (citing August 8, 2011 press release)
(“Hyperdynamics plans to drill its first two exploratory wells in its concession offshore
Guinea.”); Doc. 56 ¶ 345 (citing September 13, 2011 Form 10-K) (“We plan to drill our first well
in 2011, and a second well shortly thereafter.”); Doc. 56 ¶ 356 (citing October 13, 2011 press
release) (“The second well, Baraka-1, is scheduled to begin immediately after Sabu-1. . . . We
are excited to begin drilling operations and look forward to the results of the wells in the
upcoming months.”). The other five statements on or before October 13, 2011, spoken during
conference calls and public conferences, use more confident future-tense language indicating the
second well would in fact be drilled:
We haven’t yet decided on the exact spot to drill [the second well], and we expect
to talk more about Well Number 2 on our next conference call. . . . We’re looking
at 45 day wells. That’s our initial plan. So, with two wells drilling back to back,
you can put in the timing for that. And we’ll be announcing the results of the
wells shortly after the completion of each one of the wells. . . .
[T]he only official requirement that we have in the three year period from
September 2010 to September 2013 is one well – and 2,000 kilometers of 3-D
seismic. We’ve already finished the 3-D seismic requirement. We’re going to be
drilling more than one well. So, we filled the requirement. . . .
For the first well, we’re looking at a 45-day plan. If we spud near the beginning of
October, you’ll have it finished certainly by the end of November. But as I
mentioned earlier, there are lots of moving parts in this. So that’s an estimate, but
that’s our best estimate. And we will do the wells back-to-back, so you’re looking
at the same timeframe for the second well after the first one.
Doc. 56 ¶ 320 (citing June 30, 2011 conference call) (emphasis added); Doc. 56 ¶ 307 (citing
April 27, 2011 conference call) (“Now that all these pieces are in place and we’ve hopefully
removed any doubt that our exploration project is in a position to go forward as planned. . . .
[T]he first two wells will be within the area that we shot the 3-D.”); Doc. 56 ¶ 328 (citing July
18, 2011 statement by Defendant Leonard at industry conference) (“The first two wells, which
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will be spudded in October. They will be back-to-back wells, October, and then the middle of
November are the Sabu and the Baraka prospects shown right here.”); Doc. 56 ¶ 336 (citing
September 7, 2011 conference call) (“[T]he results from the initial two wells will be the major
factors in assessing the resources. . . . At the time of our last call in June, we pretty well-defined
the first well, Sabu-1. . . . But we’ve now completed the plans for the [second] well.”); Doc. 56 ¶
353 (citing September 28, 2011 statement by Defendant Leonard during industry conference)
(“Even after the initial two wells are drilled and the 3D is done, we’re going to have at least half
of that amount still in the bank.”).
On November 8, 2011, Defendants issued a partial corrective disclosure in a Form 10-Q.
In regard to the planned second well, Defendants stated:
We are currently reevaluating the timing of the commencement of the second
exploration well. We expect our decision to depend on numerous factors and
considerations including, the suitability and cost performance of the drilling
rig. . . . We plan to use our existing cash and proceeds from available-for-sale
securities to fund our portion of the expenditures related to our two well
exploration program.
Doc. 56 ¶ 360 (citing November 8, 2011 Form 10-Q). In regard to financing, Defendants stated:
The estimated cost for our first well is higher than we expected primarily due to
certain delays and issues related to mechanical and operational matters on the rig,
logistical delays resulting from limited port facilities in Guinea, and an expanded
well logging program. Our current estimate of the cost of our two well program is
$135 million on a gross basis, or approximately $104 million based on our current
77% interest.
Id. In a conference call on the following day, Defendant Leonard clarified the plans for the
second well:
We’ll look carefully at the ongoing performance at Jasper, as they complete
drilling the well, as well as port operations, and we’ll reevaluate with our partners
if we want to continue our original plan of drilling back to back wells using the
Jasper Explorer. At this point, however, our plans for the next well remain
unchanged, but as I mentioned, we are currently reevaluating the timing of the
two-well program in light of the current operational well results of Sabu 1.
25 / 37

Doc. 56 ¶ 366 (citing November 9, 2011 conference call). Leonard explained the delays were
caused by bottlenecks in the seaport of Conakry, the capital of Guinea, and by poor performance
of the rig. Leonard stated the rig performed poorly because it was “newly refitted and re-staffed
with a new crew, and in some of our initial operations, this revealed shortcomings and caused
additional delays.” Id. In regard to financing, Leonard explained, “[W]hile we believe that with
our current cash resources and current cost estimates, we do have the capital resources for the
two well drilling program and the 3D seismic program, we’re reevaluating the timing of the
second well as a result of the operational challenges on to Sabu-l.” Doc. 56 ¶ 367. When an
analyst pressed Leonard for a “decision tree” on when the second well would be drilled, Leonard
replied:
Well, there are three major variables in the decision making process. Number one
is the performance of the Jasper Explorer. And as I mentioned before as they
work through some of the initial issues, the performance is getting better, but let’s
see if that continues. I hope it does. Everybody will be happy if it does. The
second point is the port question. Again, we have certainly made the government
aware of it. And as I said before, some of the things that are done to fix the
situation in the short term, make it worse, because some of the construction to
such as dredging to give yourself additional space and berth at the port. In the
short term the construction has - gives more congestion. But there is a - been
acknowledgement that this is a problem. It’s just a question of how quickly it can
be fixed. And the third is the results of the well. And so you put those three things
in the mix. And then you’ll come out with your answer. I can’t tell you what that
answer is because we don’t have those three pieces yet.
Doc. 56 ¶ 369.
Plaintiffs argue Defendants knew that the second well would be delayed prior to the
corrective disclosure on November 8, 2011 and that the second well would never be drilled prior
to the corrective disclosures on January 30, 2012 (announcing an indefinite deferral), February
15, 2012 (disclosing that first well was a dry hole), and May 9, 2012 (announcing write-off of

26 / 37

drilling program).6 Plaintiffs cite internal communications at Hyperdynamics and between
Hyperdynamics and its third-party well management vendor AGR Well Management Ltd. that,
according to Plaintiffs, show Hyperdynamics was aware that the second well would never be
drilled prior to the disclosures. First, Hyperdynamics’s Logistics Operations Manager CW-1
testified he visited the Port of Conakry in February 2011 with other employees and they “knew
that [bottlenecking] was going to be an issue from the start.” Doc. 56 ¶ 162. CW-1 testified
bottlenecking was discussed in lengthy weekly meetings conducted by Defendant Leonard. AGR
Senior Drilling Engineer CW-2 testified AGR advised Hyperdynamics’s drilling manager and
Vice President of Operations about bottlenecking “from the very beginning” in weekly status
reports. Doc. 56 ¶ 168. Second, on October 12, 2011, one day prior to commencement of drilling
operations, Plaintiffs allege Hyperdynamics instructed AGR “to investigate the availability of
rigs to replace the Jasper Explorer.” Doc. 56 ¶ 207. Plaintiffs claim Defendants knew of
equipment failures on the rig that delayed commencement by thirteen days and delayed drilling
operations by four days. Doc. 56 ¶¶ 211, 222. By November 9, 2011, Plaintiffs allege Defendants
were “actively seeking an alternative rig.” Doc. 56 ¶ 362. Drilling operations were subsequently
suspended for seven days and fourteen days due to equipment failures. Doc. 56 ¶ 222. Third, on
February 2, 2012, Hyperdynamics “provided AGR with its instruction to not proceed to execute
its option to drill the [second well].” Doc. 56 ¶ 210. None of the internal reports and emails

6

In the 61 statements submitted by Plaintiffs, Defendants never expressly state the second well will not be drilled.
On the contrary, the corrective disclosures indicate the second well may still be drilled depending on “additional
cash resources through equity or debt financings, sales of additional interests in the Concession, or through other
means.” Doc. 56 ¶ 379 (citing January 30, 2012 Form 8-K). Plaintiffs do not plead drilling the second well with
additional funding or a new drilling contractor was impossible. Plaintiffs repeatedly describe the May 9, 2012 Form
10-Q, which disclosed the amortization of exploration and production costs, as a corrective disclosure of a decision
not to drill the second well. Doc. 56 ¶¶ 21, 238, 378, 390, 402, 460. Plaintiffs provide no explanation of how this
decision may be inferred from the May 9, 2012 Form 10-Q and the contrary language in the January 30, 2012 Form
8-K. Plaintiffs’ FCPA-related claims should thus be limited to the issue of whether Defendants fraudulently stated a
second well would be drilled according to the plans and estimates in the statements. As explained below, plans and
estimates generally fail to meet the materiality threshold.

27 / 37

submitted by Plaintiffs, however, indicate Defendants decided not to drill a second well with a
different well management provider.
Plaintiffs argue the instruction to AGR not to proceed with a second well shows
Defendants knew the first well was a dry hole prior to the February 15 disclosure. Plaintiffs
suggest Hyperdynamics should have known and disclosed to the public in “real time” that the
well was a dry hole, since it had immediate access to logging information. Doc. 56 ¶ 398.
Plaintiffs argue Defendants fraudulently omitted the fact that the well was a dry hole in the
February 13, 2012 announcement stating: “Results of real-time hydrocarbon chromatograph
measurements and Schlumberger petrophysical wireline analysis warranted collection of
downhole fluid samples. These samples, together with sidewall cores taken, are being sent to
Core Lab for analysis.” Doc. 56 ¶ 396. Plaintiffs do not allege any facts that would suggest the
announcement was false or that further analysis was not warranted prior to disclosing the well
was a dry hole.
Finally, Plaintiffs argue Defendants’ estimates of drilling costs were false or misleading.
Defendants’ estimates were produced by AGR’s proprietary P1TM modelling software. Doc. 56 ¶
340. The software generated overall time and cost estimates based on estimates for each item of
drilling costs and expected delays for a “rig that has spent several years in shipyards for major
refits and installations of new equipment.” Doc. 78 at 25. To determine the estimates, AGR
conducted 10,000 cost simulations using a range of values for each item of drilling costs. The
total estimates were then plotted on a curve ranging from “P0” to “P100.” The “P” numbers refer
to “cumulative probability [%].”Doc. 78-3 at 39, Doc. 78-8 at 14. A P0 cost estimate is the value
to which no simulation resulted in equal or lower costs, i.e. the value to which there is a 0%

28 / 37

probability actual costs will be less or equal.7 A P100 estimate, on the other hand, is the value to
which there is a 100% probability that actual costs will be less or equal. A P50 or “Pmean”
estimate is the value compared to which 50% of actual costs will be above and 50% below. The
AGR Contract Management Plan (CMP), approved by Hyperdynamics, represents the Pmean as
the “AGR Point Estimate” and compares it to “Expected Cost” in similar cost models. Contract,
Doc. 78-4 at ¶ IV(2); Contract Management Plan, Doc. 78-6 at 25–26. Defendants state, “AGR
made it clear these ‘Pmean’ values reflected the most likely outcomes. AGR itself used them as
the standard basis for the AFEs on its projects, including the Hyperdynamics drilling campaign.”
Doc. 78 at 24. The CMP itself describes the Pmean in more ambiguous terms, explaining that it
is “analogous” to an AFE estimate with an accuracy of +10%/-5%. Doc. 78-6 at 25. AGR’s pretender proposal states: “As a result of this approach [using P1 models] AGR has delivered each
of our last 5 wells within a range of -10% to +3% of the planned AFE cost.” Doc. 78-3 at 12. The
P1 models prepared by AGR for Hyperdynamics include charts showing estimates from P5 to
P95. At the top of the charts, Pmean, P10, and P90 estimates are indicated. P0 and P100
estimates are not shown. Docs. 78-8 to 78-11, 78-15. Plaintiffs state: “[O]perating under the P50
analysis was unreasonable given the known risks that impacted virtually every aspect of the
drilling program.” Doc. 56 ¶ 152. Plaintiffs argue even the P100 estimate would be too low; “the
P1TM analysis cannot quantify the ‘absolute worst case’ scenario because it only represents
probabilities and not certainty.” Doc. 56 ¶ 155. Plaintiffs cite AGR’s statement in parallel
litigation that “the risk of greater costs and delays to drill Sabu-1 was not, and could not be,
eliminated for any number on the probability scale whether at P50 or P100.” This is a circular
7

Confusingly, Plaintiffs define P0 as “greatest probability not to occur” and P100 as “greatest probability to occur,”
Doc. 56 ¶ 151, while Defendants define P0 as “certain to occur” and P100 as “certain not to occur.” Doc. 78 at 16.
Accurately stated, P0 is the estimate for which there is the greatest probability or certainty that higher costs will
occur and conversely that lower costs will not occur, and vice versa for P100. In parallel litigation, Defendants
describe P100 as the “absolute worst case.” Doc. 78-5 at 8.

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argument. The P1 estimates were estimates, not facts, representing the costs of every aspect of
the drilling program. See Doc. 78-3 ¶ 3.6.1 (describing P1 model as “fully risked”). Plaintiffs
appear to argue that the use of cost estimates and budgets is inherently unreasonable. Plaintiffs
have not alleged any facts that would show it was unreasonable for Defendants to rely on the
Pmean estimates provided by AGR.
Defendants’ allegedly fraudulent statements regarding cost estimates are not inconsistent
with the P1 models they received from AGR, although the numbers do not exactly match. On
August 10, 2011, AGR sent Defendants a P1 model with the following estimates for the first
well:

First Well

8

P10
$27.7 million9

Pmean
$32.5 million

P90
$38.3 million

Doc. 78-7 at 13. On September 7, 2011, AGR sent Defendants an updated model with the
following estimates:

First Well
Mobilization &
Demobilization10

8

P10
$28.3 million

Pmean
$35 million

P90
$43.2 million

$21.3 million

The record does not include a P1 estimate dated August 10, 2011 for the second well. Also, it is not clear whether
the mobilization and demobilization (Mob/Demob) cost for one or both wells is included in the drilling cost
estimate. The P1 model includes “Rig Mobilization . . . total USD 3,600,000, 50% per well,” “Rig Demobilization
. . . total USD 950,000, 50% per well,” Doc. 78-7 at 10, and “Move Rig to Drilling Location, [$]3,901,492.” Doc.
78-7 at 42. AGR’s “Design Rationale Document” dated August 2011 states the model includes the lump sum cost
of rig mobilization from Singapore to Guinea but not equipment mobilization to the rig in Singapore or equipment
demobilization. Doc. 78-7 at ¶ 4.16.1.
9
Defendants state the August 10, 2011 estimates were in dollars (Doc. 78 at 24) but the P1 model indicates Pounds
Sterling. Doc. 78-7. The August 30, 2011 Design Rationale Document, Doc. 78-7 at 81, and updated P1 models state
dollars for similar amounts suggesting a labeling error.
10
It is not clear whether the mobilization and demobilization (Mob/Demob) estimate is included in the well drilling
cost estimate. Both P1 models include rig mobilization. [First well] P-1 Model, Doc. 78-8 at 44 (“Phase 1 – Move
Rig to Drilling Location, [$]2,347,903”); Mob-Demob P-1 Model, Doc. 78-8 at 70 (“Move Rig to Drilling Location,
[$]6,759,130”). Defendants describe the Mob/Demob P1 Model as a “separate breakout,” suggesting it is included in
the P1 model for the well. Doc. 78 at 25. In parallel litigation, however, Defendants describe the Mob/Demob cost
as not included and apportion half to each well as additional costs. SCS Corp. v. AGR Well Mgmt. Ltd., Claim No.
HT-12-194, High Court of Justice Queen’s Bench Division, Technology & Construction Court (April 11, 2014),
Doc. 78-3 at ¶4(5). Plaintiffs state the Mob/Demob estimate is not included in the well estimate. Doc. 56 ¶ 153.

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Doc. 78-8 at 14. On September 7, 2011, Defendant Leonard stated estimated drilling cost for
both wells was $80 million, adding, “We have adequate funding for the two well program and
the additional 3-D survey of the deeper water, so we’re under no pressure whatsoever to farm out
an additional interest in another company.” Doc. 56 ¶ 337 (citing September 7, 2011
conference call). In its subsequent annual report, Hyperdynamics announced a “revised budget of
$95 million for 2011. The revised budget includes the previously approved drilling of two
exploration wells planned for the fourth quarter, as well as the new seismic survey.” Doc. 56 ¶
346 (citing September 13, 2011 Form 10-K). On September 20, 2011, Defendants entered an
agreement for the 3D seismic survey expected to cost $29 million. Doc. 56 ¶ 236. On October
12, 2011, AGR sent Defendants a revised model for both wells corrected for currency conversion
errors:

First Well
Second Well
Mobilization &
Demobilization11

P10
$37.3 million
$41.5 million

Pmean
$45.8 million
$51 million

P90
$56.2 million
$62.4 million

$26.2 million

Doc. 78-8 at 129. On November 8, 2011, Defendants issued a partial corrective disclosure in its
quarterly report, stating:
The estimated cost for our first well is higher than we expected primarily due to
certain delays and issues related to mechanical and operational matters on the rig,
logistical delays resulting from limited port facilities in Guinea, and an expanded
well logging program. Our current estimate of the cost of our two well program is
$135 million on a gross basis, or approximately $104 million based on our current
77% interest.
Doc. 56 ¶ 237 (citing November 8, 2011 Form 10-Q). The following chart summarizes the
October 12, 2011 estimates, current as of the November 8, 2011 statement (the only cited
11

Again, it is not clear to what extent the Mob/Demob estimate may overlap with the well estimates. All three P1
models include rig mobilization. [First well] P-1 Model, Doc. 78-8 at 114 (“Phase 1 – Move Rig to Drilling
Location, [$]1,704,996”); [Second well] P-1 Model, Doc. 78-9 at 57 (“Phase 1 – Move Rig to Drilling Location,
[$]3,250,521”); Mob-Demob P-1 Model, Doc. 78-8 at 140 (“Move Rig to Drilling Location, [$]5,319,320”).

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statement issued after Defendants had received estimates for both wells), compared with
Hyperdynamics’s September 30, 2011 reported assets:
ASSETS
Cash + AFS12
COSTS
First Well
Second Well
Mob/Demob
Seismic Survey
TOTAL COSTS
77% share of “ “
BALANCE

P10
$37.3 million
$41.5 million
$26.2 million
$134 million
$103.2 million
$36 million

$128 million
Pmean
$45.8 million
$51 million
$26.2 million
$29 million
$152 million
$117 million
$25 million

P90
$62.4 million
$62.4 million
$26.2 million
$180 million
$138.6 million
$11.3 million

For each of the P10, Pmean, and P90 estimates, Defendants had a positive balance of liquid
assets minus estimated costs, suggesting Defendants had sufficient funds to carry out the drilling
program. Plaintiffs do not plausibly allege “Hyperdynamics had little to no funds available to
mobilize and drill [the second well] without outside money.” Doc. ¶ 237.
Plaintiffs allege on September 7, 2011 AGR provided a P100 estimate of $97 million for
the first well. Doc. 56 ¶ 155. This estimate would result in a deficiency of $12.3 million. The P1
model submitted in the record, however, does not include a P100 estimate. The model includes
charts and tables showing only estimates from P5 to P95, as well as a table of “histogram data”
with the results of simulations used to calculate the probability of costs for drilling the first well,
displayed in $1000 increments. The last ten items are as follows:
Cost Range
$76000-77000
$77000-78000
$78000-79000
$79000-80000
$80000-81000
$81000-82000
12

Probability
0.01
0
0
0.01
0
0

As of September 30, 2011, Hyperdynamics reported $74 million in cash and $54 million in available-for-sale
(AFS) securities, totaling $128 million. Doc. 56 ¶ 237.

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$82000-83000
$83000-84000
$84000-85000
$85000-86000

0
0
0
0.01

Doc. 78-8 at 45. The purported P100 estimate is derived by adding the highest possible cost
($86,000) according to the last listed simulation result out of 10,000 simulations, showing a .01%
chance of $85000-$86000 costs, plus one-half of $21.3 million mobilization/demobilization costs
($10.65 million), equaling $96.65 million. As explained above, a P100 estimate represents the
value for which AGR determined there was a 0% probability of greater costs. Plaintiffs point out
Hyperdynamics had an additional $800,000 monthly “cash burn” for “SG&A,” apart from
drilling and seismic costs, but this amount is not enough to create a deficiency over the estimated
time period.
In sum, the P1 models in the record do not plausibly support a claim that Defendants
misrepresented cost estimates or the adequacy of their funds. Defendants’ statements were
reasonably consistent and not directly contrary to the estimates they had received from AGR. See
Abrams v. Baker Hughes Inc., 292 F.3d 424, 433–34 (5th Cir. 2002) (“[A]s long as public
statements are reasonably consistent with reasonably available data, corporate officials need not
present an overly gloomy or cautious picture.”) (quoting Novak v. Kasaks, 216 F.3d 300, 309 (2d
Cir. 2000) and distinguishing Serabian v. Amoskeag Bank Shares, 24 F.3d 357, 365 (1st Cir.
1994) which the court cited for the proposition that a “statement that loss reserves were adequate,
conservative and cautious directly contrary to identified internal reports was sufficient to state a
claim.”).
In addition to P1 models, Plaintiffs allege AGR sent an email to Defendants on January
27, 2012 stating AGR was “committed to completing the Hyperdynamics Sabu #1 well and demobbing the rig” and that “the Inventory cannot be viewed as part of the primary funding
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process” due to difficulty in selling unused equipment, eliminating funds available for the second
well with a different rig. Doc. 56 ¶ 239. Plaintiffs argue this email shows the “handwriting was
clearly on the wall that the Company would not be drilling the [second] well. But, investors did
not learn of this crucial fact for months – until May 9, 2012.” Doc. 56 ¶ 378. On the contrary,
Hyperdynamics released a statement three days later on January 30, 2012 explaining:
After consideration of the suitability and cost performance of that rig and the
effect of the delays and increased cost on our liquidity and capital resources, we
plan to defer the commencement of the next exploration well. Our ability to drill a
second well will depend on obtaining additional cash resources through equity or
debt financings, sales of additional interests in the Concession, or through other
means.
Doc. 56 ¶ 379. Plaintiffs do not plead the January 30, 2012 filing fraudulently omits any
information from the January 27, 2012 email.
Applying the materiality test under Rule 10b-5, Plaintiffs’ fail to plead material
omissions regarding drilling plans and cost estimates. First, Hyperdynamics’s eleven statements
regarding the company’s future plans to drill two wells are immaterial under the exception for
forward-looking statements13 or, alternatively, under the bespeaks caution doctrine. 15 U.S.C. §
77z-2 (defining forward-looking statements broadly and expressly including “statements of the
plans and objectives of management for future operations”). Furthermore, none of the statements
“would have been viewed by the reasonable investor as having significantly altered the ‘total
mix’ of information made available,” in particular the fact that Hyperdynamics had no prior oil

13

Plaintiffs cite two statements regarding drilling plans and cost estimates as “not forward-looking,” both of which
appear forward-looking. Doc. 56 ¶ 299 (citing February 17, 2011 statement at industry conference) (“[O]ur goal is to
begin drilling the first of at least two wells near the end of the year.”); Doc. 56 ¶ 353 (citing September 28, 2011
conference call) (“[E]ven after the initial two wells are drilled and the 3D is done, we’re going to have to at least
half of that amount still in the bank. So we’re entirely funded and solid with no financial difficulties and ready to
move forward.”). Plaintiffs cite eleven statements as “statements of mixed tense” without explanation. Doc. 80 at 21.
None of the cited statements can be plausibly read to misrepresent or omit existing facts as to the feasibility of and
adequacy of funding for the second well. The statements do include representations as to existing finances and
operational status, but these are not alleged to be fraudulent except insofar as they misrepresented by omission
Defendants’ plans and estimates, which are not material.

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exploration experience and that its sole asset was an unproved concession in Guinea. Basic, 485
U.S. at 231. Plaintiffs do not plausibly allege the day-to-day equipment delays in the fall of 2011
precluded a second well or were otherwise material prior to the disclosure on November 8, 2011.
Doc. 56 ¶ 360. Similarly, Plaintiff does not explain how “real time” logging information was
material prior to the disclosure of the dry hole. Doc. 56 ¶ 398. Second, Plaintiffs fail to plead
Hyperdynamics’s statements regarding cost estimates were not “reasonably consistent with
reasonably available data,” in particular the Pmean estimates. Abrams, 292 F.3d at 433.
In regard to scienter, Plaintiffs have not alleged facts that would support a strong
inference of knowledge or severe recklessness as to the fraudulent nature of statements regarding
the second well and adequacy of funding. As explained above, Plaintiffs have not pled any of the
statements were false or misleading when made. Furthermore, Plaintiffs have not pled
Defendants intentionally misrepresented AGR’s time and cost estimates, that they presented
them to shareholders knowing they were misleading, or that the estimates presented an “obvious
danger of misleading buyers of Defendant[s’] securities as to the value of the company’s assets”
which should have been known to Defendants. Spitzberg v. Houston Am. Energy Corp., 758 F.3d
676, 684 (5th Cir. 2014) (holding statements plausibly suggesting oil was found in dry hole and
unexplored concession may have been obviously misleading). In parallel litigation, a New York
State Court dismissed misrepresentation claims against Defendants under a lower standard of
negligence. Iroquois Master Fund Ltd. v. Hyperdynamics Corp., et al., Index No. 651614/2012
(N.Y. Sup. Ct. June 19, 2013). Hyperdynamics, in turn, sued AGR for its failure to meet the time
and cost estimates on which Defendants relied, obtaining a $17.7 million settlement. Form 8-K
(May 22, 2014), Doc. 78-10 at 31 (citing Jasper Drilling Private Ltd. v. AGR Well Mgmt. Ltd.,
No. HT-13-100, High Court (Technology & Construction) (Eng.)).
35 / 37

In regard to proximate causation, Plaintiffs have adequately pled a “connection” between
the alleged fraudulent statements and a purchase or sale of Hyperdynamics stock, according to
the liberal “touch” test. Alley v. Miramon, 614 F.2d 1372, 1378 (5th Cir. 1980). The Court
presumes the statements affected the market price of Hyperdynamics stock and that Plaintiffs
relied on the statements, and Defendants have not rebutted the presumption. Halliburton II, 134
S. Ct. at 2408. Plaintiffs have provided a schedule of transactions showing some sales indicating
economic losses. Plaintiffs have not, however, pleaded loss causation by connecting each loss to
the value of the securities in the absence of a fraudulent statement, as required by the PSLRA. 15
U.S.C. § 78u-4 (“In any private action arising under this chapter, the plaintiff shall have the
burden of proving that the act or omission of the defendant alleged to violate this chapter caused
the loss for which the plaintiff seeks to recover damages.”). Plaintiffs have the burden of
showing it is more probable than not that a substantial amount of the decline of Hyperdynamics’s
stock was a result of corrective disclosures as opposed to other depressive factors. Amedisys, 769
F.3d at 320-21. Other factors may include “changed investor expectations” and “firm-specific
facts, conditions, or other events.” Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 343. Here, firmspecific facts affecting Hyperdynamics’s stock price included Hyperdynamics’s failure to find
commercial quantities of oil. Plaintiffs allege eleven statements in 2011 fraudulently referred to
“two wells” and unreasonable cost estimates. According to Plaintiffs, these statements artificially
inflated the stock price. Only after the February 27, 2011 and July 15, 2011 statements, which
offered general statements of confidence prior to the alleged delays and cost overruns, did the
stock price increase (6% and 4%). Otherwise, the stock price declined slightly in the day after the
statements, -1% on average. In between, the stock price swung widely, including declines up to
24% and gains up to 40%, with an average gain of 4% in between statements. When
36 / 37

Hyperdynamics disclosed the well was a dry hole, the stock price declined 29%, following a
decline of 20% over the two previous days after a cautionary announcement that Hyperdynamics
was analyzing the results. The stock price declined another 44% over the next three months prior
to announcing amortization of drilling costs, which resulted in a 4% decline. In total, the
announcement of the dry hole resulted in a 70% decline. Plaintiffs have not alleged facts which
would show it is more probable than not that their losses, in general, resulted from corrective
disclosures related to cost overruns and drilling plans for the second well. The Court, however,
will not undertake an independent analysis of each of the 22 cited price changes to determine if
there is any plausible connection between a price change and a statement regarding the second
well or funding, since the statements were immaterial.
Plaintiffs have failed to allege facts that would show materiality, scienter, and loss
causation under Rule 10b-5. Plaintiffs chose to invest in a wildcat well in Guinea with an
inexperienced operator having full knowledge of the geological, operational, and regulatory
risks. Rule 10b-5 does not entitle them to a return on this investment.

III.

Conclusion
For the foregoing reasons, it is hereby
ORDERED that Defendant’s Motion to Consolidate (Doc. 57) is DENIED, and
ORDERED that Defendant’s Motion to Dismiss (Doc. 78) is GRANTED.
SIGNED at Houston, Texas, this 25th day of August, 2015.

___________________________________
MELINDA HARMON
UNITED STATES DISTRICT JUDGE

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