IN RE: COBALT INTERNATIONAL ENERGY, INC. SECURITIES LITIGATION

Filing 108

MEMORANDUM AND ORDER granting in part and denying in part 81 Motion to Dismiss with leave to replead by 2/5/16; denying [82, 83, 84] Motions to Dismiss.(Signed by Judge Nancy F. Atlas) Parties notified.(TDR, 4)

United States District Court
Southern District of Texas

ENTERED
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION

IN RE COBALT INTERNATIONAL
ENERGY, INC. SECURITIES
LITIGATION

§
§
§

January 19, 2016
David J. Bradley, Clerk

CIVIL ACTION NO. H-14-3428

MEMORANDUM AND ORDER
This securities case is before the Court on the Motion to Dismiss [Doc. # 81]
filed by Defendants Goldman, Sachs & Co. (“Goldman Sachs”), Morgan
Stanley & Co. LLC, Credit Suisse Securities (USA) LLC, Citigroup Global Markets
Inc., J.P. Morgan Securities LLC, Tudor, Pickering, Holt & Co. Securities, Inc.,
Deutsche Bank Securities Inc., RBC Capital Markets, LLC, UBS Securities LLC,
Howard Weil Incorporated, Stifel, Nicolaus & Company, Incorporated, Capital One
Southcoast, Inc., and Lazard Capital Markets LLC (collectively, “Underwriter
Defendants”).1

Also pending is the Motion to Dismiss [Doc. # 82] filed by

Defendants Goldman Sachs Group, Inc., Riverstone Holdings LLC (“Riverstone”),
First Reserve, and Kern Partners Ltd. (“Kern”) (collectively together with The Carlyle

1

Plaintiffs GAMCO Global Gold, Natural Resources & Income Trust, GAMCO
Natural Resources, Gold & Income Trust, St. Lucie County Fire District Firefighters’
Pension Trust Fund, Fire and Police Retiree Health Care Fund, San Antonio, Sjunde
AP-Fonden, and Universal Investment Gesellschaft m.b.H. filed an Opposition [Doc.
# 89], and the Underwriter Defendants filed a Reply [Doc. # 97].

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Group, L.P., “Control Defendants”), in which Defendant The Carlyle Group, L.P.
(“Carlyle”) joined [Doc. # 84].2 Cobalt International Energy, Inc. (“Cobalt”), Joseph
H. Bryant, James W. Farnsworth, John P. Wilkirson, Peter R. Coneway, Henry
Cornell, Jack E. Golden, N. John Lancaster, Jon A. Marshall, Kenneth W. Moore,
J. Hardy Murchison, Michael G. France, Kenneth A. Pontarelli, Scott L. Lebovitz,
Myles W. Scoggins, D. Jeff van Steenbergen, Martin H. Young, Jr., and William P.
Utt (collectively, the “Cobalt Defendants”) filed a separate Motion to Dismiss [Doc.
# 83], to which Plaintiffs filed an Opposition [Doc. # 88], and the Cobalt Defendants
filed a Reply [Doc. # 98].
The Court has reviewed the full record, including Plaintiffs’ Consolidated
Amended Class Action Complaint (“Complaint”) [Doc. # 72]. Based on this review,
and the application of relevant legal authorities, the Court grants in part and denies
in part the pending Motions to Dismiss.
I.

BACKGROUND
Cobalt is an exploration and production company that was formed in 2005 as

a private company. Defendant Joseph H. Bryant, Goldman Sachs, and Riverstone
founded the company, which was incorporated in the state of Delaware. Cobalt

2

Plaintiffs filed an Opposition [Doc. # 90], and the Control Defendants filed a Reply
[Doc. # 95], in which Defendant Carlyle joined [Doc. # 96].

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conducted an initial public offering (“IPO”) of its shares in December 2009. At the
time of the IPO, Bryant was Cobalt’s Chief Executive Officer (“CEO”) and Chairman
of Cobalt’s Board of Directors.
In 2007, Cobalt entered into an agreement with Sonangol E.P. (“Sonangol”),
the Angolan national oil company, to acquire a 40% interest in oil exploration
Blocks 9, 20, and 21 in offshore Angola. In 2009, the Angolan Parliament issued two
decrees assigning an interest in the Blocks to Nazaki Oil & Gaz (“Nazaki”), Sonangol
P&P, and Alper Oil, Limitada (“Alper”). In February 2010, Cobalt and these other
companies signed Risk Services Agreements (“RSAs”) with Sonangol.
On January 4, 2011, Cobalt filed a Registration Statement and Prospectus
(“January 2011 Registration Statement”) with the Securities and Exchange
Commission (“SEC”). Based on this 2011 Registration Statement, Cobalt conducted,
inter alia, a stock offering in late February 2012 (“February 2012 Stock Offering”)
and a bond offering in December 2012 (“2012 Bond Offering”).
On March 10, 2011, Cobalt learned that the SEC was conducting an informal
inquiry into allegations that there existed a connection between Nazaki and senior
government officials in Angola. The next day, Cobalt contacted the Department of
Justice (“DOJ”) regarding the same allegations. Both the SEC and the DOJ began
formal investigations into whether Cobalt had violated the Foreign Corrupt Practices

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Act of 1977 (“FCPA”). The SEC investigation terminated in January 2015 with no
recommendation for enforcement action against Cobalt. The DOJ investigation
remains ongoing.
Meanwhile, Cobalt drilled two exploration wells in the offshore Angola drilling
region: Lontra on Block 20 and Loengo on Block 9. Cobalt had no rights to gas
discoveries and, instead, had rights only to any oil that was discovered in the Blocks.
Ultimately, Lontra was found to contain a substantially higher percentage of gas than
originally estimated, and drilling at Loengo failed to discover oil.
On November 30, 2014, Plaintiffs St. Lucie County Fire District Firefighters’
Pension Trust Fund (“St. Lucie”) and Fire and Police Retiree Health Care Fund, San
Antonio (“San Antonio”), who each purchased Cobalt securities, filed a Complaint
[Doc. # 1] alleging violations of the Securities Exchange Act of 1934 (“Exchange
Act”) and the Securities Act of 1933 (“Securities Act”). On December 5, 2014,
Steven Neuman, a purchaser of Cobalt securities, filed a Complaint [Doc. # 1 in Civil
Action No. H-14-cv-3488], alleging violations of the Securities Act and the Exchange
Act. By Order [Doc. # 67] entered March 3, 2015, the Court consolidated the two
civil cases. By Order [Doc. # 68] entered the same day, the Court appointed GAMCO
Global Gold, Natural Resources & Income Trust and GAMCO Natural Resources, Gold &
Income Trust (collectively, “GAMCO”) as lead Plaintiffs in the consolidated cases.

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On May 1, 2015, Plaintiffs filed their Consolidated Amended Class Action
Complaint (“Complaint”) [Doc. # 72]. Plaintiffs allege in Count I of their Complaint
that Cobalt and its executives violated Section 10(b) of the Exchange Act and
Rule 10b-5. In Count II, Plaintiffs allege that Cobalt and its executives violated
Section 20(a) of the Exchange Act. Plaintiffs assert in Count III a claim under Section
11 of the Securities Act against Cobalt, its directors, and the Underwriter Defendants.
In Count IV, Plaintiffs assert a claim against the Control Defendants under Section 15
of the Securities Act. In Count V, Plaintiffs assert a claim against the Underwriter
Defendants under Section 12(a)(2) of the Securities Act.
Defendants filed their Motions to Dismiss. All Defendants seek dismissal of
all claims against them. The Motions to Dismiss have been fully briefed and are now
ripe for decision.
II.

APPLICABLE LEGAL STANDARDS
A.

Pleading Standard for Motion to Dismiss

A motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil
Procedure is viewed with disfavor and is rarely granted. Turner v. Pleasant, 663 F.3d
770, 775 (5th Cir. 2011) (citing Harrington v. State Farm Fire & Cas. Co., 563 F.3d
141, 147 (5th Cir. 2009)). The complaint must be liberally construed in favor of the
plaintiff, and all facts pleaded in the complaint must be taken as true. Harrington, 563

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F.3d at 147. The complaint must, however, contain sufficient factual allegations, as
opposed to legal conclusions, to state a claim for relief that is “plausible on its face.”
See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Patrick v. Wal-Mart, Inc., 681 F.3d
614, 617 (5th Cir. 2012). When there are well-pleaded factual allegations, a court
should presume they are true, even if doubtful, and then determine whether they
plausibly give rise to an entitlement to relief. Iqbal, 556 U.S. at 679.
Except as explained below regarding the special pleading requirements for two
elements of a § 10(b) claim, these pleading requirements apply to Plaintiffs’ claims
in this case. See Kapps v. Torch Offshore, Inc., 379 F.3d 207, 210 (5th Cir. 2004)
(“Section 11 only requires notice pleading under FED. R. CIV. P. 8 rather than the
detailed pleading mandated by FED. R. CIV. P. 9(b) or the Private Securities Litigation
Reform Act”); In re Kosmos Energy Ltd. Sec. Litig., 955 F. Supp. 2d 658 (N.D. Tex.
2013).
B.

Special Pleading Requirements for § 10(b) Claims

The basic elements of a § 10(b) claim involving publicly traded securities are:
(1) a material misrepresentation or omission, (2) in connection with the purchase or
sale of a security, (3) scienter by the defendant, (4) justifiable reliance by the plaintiff,
(5) damages; and (6) a causal connection between the material misrepresentation and
the loss, referred to a “loss causation.” See Lormand v. US Unwired, Inc., 565

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F.3d 228, 238-39 (5th Cir. 2009). The Private Securities Litigation Reform Act
(“PSLRA”) imposes a heightened pleading requirement for two elements of a § 10(b)
claim – the misrepresentation and scienter elements. See Owens v. Jastrow, 789 F.3d
529, 535 (5th Cir. 2015) (citing 15 U.S.C. § 78u–4; Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 321 (2007)). Specifically, “the PSLRA requires a plaintiff
to identify each allegedly misleading statement with particularity and explain why it
is misleading, the so-called ‘particularity’ requirement.” Lormand, 565 F.3d at 239
(citing 15 U.S.C. § 78u–4(b)(1)).
Additionally, the PSLRA requires a plaintiff to allege facts “giving rise to a
strong inference that the defendant acted with the required state of mind.” Id. (quoting
15 U.S.C. § 78u–4(b)(2)). To satisfy the pleading standard for the required “strong
inference” of scienter, the allegations must create an inference of scienter that is “at
least as compelling as any opposing inference one could draw from the facts alleged.”
Owens, 789 F.3d at 536 (quoting Tellabs, 551 U.S. at 324). “[A] tie favors the
plaintiff.” Id. (quoting Lormand, 565 F.3d at 254).
III.

COBALT DEFENDANTS’ MOTION TO DISMISS
A.

“Foundational Infirmities”

The Cobalt Defendants argue that the allegations in the Complaint should be
“deeply discounted because of their dubious origins.” See Cobalt Defendants’

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Motion, p. 20. Specifically, the Cobalt Defendants ask the Court to disregard
allegations based on information from confidential witnesses and various published
articles. The Cobalt Defendants argue also that Plaintiffs engaged in “selective
editing” of the documents on which they base their claims.
Courts often discount allegations from confidential sources. See, e.g., Ind. Elec.
Workers’ Pension Trust Fund v. Shaw Group, Inc., 537 F.3d 527, 535 (5th Cir. 2008).
In this case, however, the confidential witnesses not identified by name are adequately
identified in other ways and the basis for their knowledge is set forth in the Complaint.
For example, two of the confidential witnesses are Cobalt’s Chief Financial Officer
(“CFO”) and Executive Vice President from June 2009 to June 2010, and its Chief
Information Officer (“CIO”) from June 2012 to April 2014. Another was the
executive administrative assistant for Cobalt’s West Africa division from April 2010
to March 2015, who reported to Richard Smith (at the relevant time, Cobalt’s Country
Manager for Angola and Vice President, International Business Development,
Commercial and Finance) for her first two years at Cobalt, and to Michael Drennon
(Cobalt’s Executive Vice President and General Manager Angola) throughout her
tenure at Cobalt. These witnesses may be confidential to the extent that their names
are not included in the Complaint, but they are neither anonymous nor secret. The

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allegations in the Complaint based on knowledge obtained from these witnesses will
not be discounted, deeply or otherwise.
Plaintiffs identify and cite to several articles which the Cobalt Defendants argue
lack reliability. The cited articles relate primarily to the issue regarding Cobalt’s
alleged knowledge that Nazaki and Alper were owned by Angolan governmental
officials, providing one source of evidentiary support for the allegations. Plaintiffs
allege other bases, however, for their claim that the Cobalt Defendants made false or
misleading statements. The content of the articles is properly alleged and the accuracy
of the articles is not a proper subject for a motion to dismiss.
The Cobalt Defendants argue also that Plaintiffs selectively edited certain
statements, and that the editing “casts even further doubt on Plaintiffs’ claims.” See
Cobalt Defendants’ Motion, p. 25. The pleading stage, however, is not the time to
consider whether Plaintiffs’ allegations should be doubted. The only issue is whether
Plaintiffs’ allegations in the Complaint satisfy the pleading requirements of the
Federal Rules of Civil Procedure and the PSLRA.
B.

Allegations of False or Misleading Statements

The Cobalt Defendants argue that Plaintiffs’ § 10(b) and § 11 claims should be
dismissed for failure to allege a false or misleading statement. As noted above, an
essential element of a § 10(b) claim is that the defendant made a material statement

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that was false or misleading. See Lormand, 565 F.3d at 238. The only elements of
a § 11 claim are: (1) an omission or misrepresentation of (2) a material fact required
to be stated or necessary to make other statements not misleading. See Krim v.
BancTexas Group, Inc., 989 F.2d 1435, 1445 (5th Cir. 1993); see also In re Franklin
Bank Corp. Sec. Litig., 782 F. Supp. 2d 364, 379 (S.D. Tex. 2011). A fact is
“material” if “a reasonable investor would consider [it] significant in the decision
whether to invest, such that it alters the total mix of information available about the
proposed investment.” Krim, 989 F.2d at 1445.
Nazaki and Alper.– Plaintiffs adequately allege with particularity that the
Cobalt Defendants, through corporate filings and through statements during investor
conference calls, misrepresented their knowledge that Angolan government officials
owned Nazaki and Alper. Plaintiffs allege also that the Cobalt Defendants, in Cobalt’s
2011 Form 10-K and otherwise, falsely represented that Nazaki was “a full paying
member” of the partnership with Cobalt.3
Plaintiffs allege that an attorney in the United States conducted an investigation
in 2008 and “was told that” Nazaki was controlled by Angolan government officials.
3

The Cobalt Defendants argue that “full paying member” did not mean a member who
had paid anything but, instead, described Nazaki’s interests in the Angolan blocks as
“non-carried.” See Cobalt Defendants’ Motion [Doc. # 83], p. 40. While this
argument may be relevant to a motion for summary judgment, it does not indicate that
Plaintiffs have failed to allege false and misleading statements to support their claims
under the Securities Act and the Exchange Act.

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Plaintiffs allege that it had been publicly reported as early as the first half of 2010 that
Nazaki was controlled by an Angolan General. Plaintiffs allege that the Global
Witness reported in May 2010 that “top Angolan officials” might be using Nazaki and
Alper as fronts for the officials’ own private benefit. Plaintiffs allege that, in response
to the Global Witness report, the Cobalt Defendants denied the allegations and
claimed they were unaware of any connection between Nazaki and any senior
Angolan government officials. Plaintiffs allege that, even after the Financial Times
reported in April 2012 that the three senior Angolan officials admitted their ownership
of Nazaki, the Cobalt Defendants said they had refuted any allegations of wrongdoing
and had conducted rigorous due diligence on the issue of Nazaki’s ownership
beginning in 2007.
These and many other allegations in the Complaint satisfy the PSLRA
requirements for pleading a false or misleading representation regarding a material
matter – the ownership of Nazaki and Alper and whether Nazaki was a “full paying
member” of the partnership.
Longra and Loengo Wells.– Plaintiffs adequately allege with particularity that
the Cobalt Defendants through corporate filings and through statements during
investor conference calls misrepresented their knowledge regarding the Longra and
Loengo wells. Plaintiffs allege that the Cobalt Defendants described the two wells in

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the offering materials for the January 2013 and May 2013 stock offerings as “large
[and] oil-focused.” Plaintiffs allege that the Cobalt Defendants throughout 2013
described Lontra as a “super-size prospect” with oil potential greater than a billion
barrels.

Plaintiffs allege that Cobalt’s Chief Exploration Officer, Defendant

Farnsworth, falsely stated in October 2013 that Lontra was “not the big gas field” but
was, instead, “an oil field” that was “a significant discovery.” Plaintiffs allege that the
Cobalt Defendants made these representations knowing that Lontra was primarily gas,
to which Cobalt had no rights, and that there was “not even a remote chance” of
success in the Loengo well.
Forward-Looking Statements.– The Cobalt Defendants argue also that certain
statements regarding the Angolan wells are protected by the PSLRA’s Safe Harbor
clause as forward-looking.

Under the Safe Harbor clause, a forward-looking

statement is not actionable if: (1) it is identified as forward-looking and is
accompanied by “meaningful cautionary statements identifying important factors that
could cause actual results to differ materially;” (2) it is immaterial; or (3) the plaintiff
fails to plead that the forward-looking statement was made with actual knowledge
that it was false or misleading. See Lormand, 565 F.3d at 243 (citing 15 U.S.C.
§ 78u–5(c)(1)(A), (B); Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365
F.3d 353, 371-72 (5th Cir. 2004)). “Whether or not a statement is forward-looking

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is governed by the nature of the statement, not a litigant’s allegations about the
statement.” KB Partners I, L.P. v. Pain Therapeutics, Inc., 2015 WL 7760201, *10
(W.D. Tex. Dec. 1, 2015).
Many court have held that the Safe Harbor clause does not protect statements
when the plaintiff adequately alleges that the defendant knew his statements were
misleading when made. See, e.g., Lormand, 565 F.3d at 244 (“Because the plaintiff
adequately alleges that the defendants actually knew that their statements were
misleading at the time they were made, the safe harbor provision is inapplicable to all
alleged misrepresentations.”); Marcus v. J.C. Penney Co., Inc., 2015 WL 5766870,
*2 (E.D. Tex. Sept. 29, 2015). Plaintiffs in this case clearly allege that the Cobalt
Defendants knew “fairly early on” that the Lontra well was producing primarily gas,
to which Cobalt had no rights, and knew by the end of 2013 that there was “not even
a remote chance” that the Loengo well would be successful. As a result, to the extent
a plaintiff’s allegation that the defendant knew that the statements were misleading
precludes application of the Safe Harbor clause, the Motion to Dismiss based on that
provision is denied.
Moreover, the Safe Harbor clause applies only when the alleged
misrepresentations are accompanied by “meaningful cautionary language.” See
Lormand, 565 F.3d at 244 (quoting 15 U.S.C. § 78u-5(c)(1)(A)(i)). “When risks have

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already begun to materialize, it is no longer sufficient to generally warn of the
possibility of these risks in the future.” Marcus, 2015 WL 5766870 at *3. “When
cautionary language is glossed over as a future risk rather than the certain dangers that
had already begun to materialize then the warnings are no longer meaningful.” Id.
(internal quotations and ellipsis omitted). In this case, the Cobalt Defendants note that
the statements regarding the Lontra and Loengo wells related to their “potential” and
“prospects.” Plaintiffs allege, however, that by the time the Cobalt Defendants made
the statements in 2012 and 2013 regarding the potential of the Lontra and Loengo
wells, these Defendants already knew that the wells had limited potential, and that the
risks that the Lontra well would be primarily gas and that the Loengo well would be
a “dry” well had already begun to materialize. As a result, Plaintiffs have adequately
alleged that the Safe Harbor provision does not apply to protect the “forward-looking”
statements.
Conclusion Regarding Material Misrepresentation Element.– Plaintiffs have
adequately alleged with particularity the factual basis for the material
misrepresentation element of their § 10(b) and § 11 claims.
C.

Allegations of Scienter

Scienter is an element of Plaintiffs’ § 10(b) claim. “When analyzing a
complaint for scienter, a court must ‘assess all the allegations holistically,’ not in

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isolation.” Owens, 789 F.3d at 536 (quoting Tellabs, 551 U.S. at 326). Plaintiffs have
alleged, primarily based on information received from the confidential witnesses who
were Cobalt insiders, that the Cobalt Defendants knew that Nazaki was owned by
Angolan officials. Plaintiffs have similarly alleged, based on information from Cobalt
insiders, that the Cobalt Defendants knew “fairly early on” that Lontra was primarily
gas, to which Cobalt had no rights, and that there was “not even a remote chance” that
Loengo would be successful. Viewing all the factual allegations in the Complaint
holistically and not in isolation, the Court finds that Plaintiffs have alleged with
adequate particularity that the Cobalt Defendants acted with the requisite scienter.
D.

Allegations of Loss Causation

The loss causation element of a § 10(b) claim under the PSLRA requires the
plaintiff to prove that the defendant’s act or omission caused plaintiff’s loss. See 15
U.S.C. § 78u–4(b)(4); Pub. Emp. Ret. Sys. of Miss. v. Amedisys, Inc., 769 F.3d 313,
320 (5th Cir. 2014). “For a complaint to adequately plead this requirement, it need
only set forth ‘a short and plain statement of the claim showing that the pleader is
entitled to relief’ and provide the defendant with ‘fair notice of what the plaintiff’s
claim is and the grounds upon which it rests.’” Amedisys, Inc., 769 F.3d at 320
(quoting Dura Pharm., Inc., v. Broudo, 544 U.S. 336, 341-42 (2005)). The plaintiff
“must allege that when the ‘relevant truth’ about the fraud began to leak out or

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otherwise make its way into the marketplace, it caused the price of the stock to
depreciate and, thereby, proximately caused the plaintiff’s economic harm.” Id.
(citing Lormand, 565 F.3d at 255 (citing Dura, 544 U.S. at 342)). “Loss causation in
fraud-on-the-market cases can be demonstrated circumstantially 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 drop.”
Id. at 320-21 (internal quotations and citations omitted).
In this case, Plaintiffs have alleged that the Cobalt Defendants misrepresented
their knowledge of the connection between Nazaki and senior government officials
in Angola, and misrepresented their knowledge regarding the Lontra and Loengo
wells. Plaintiffs have alleged that when Cobalt issued corrective disclosures on
December 1, 2013, admitting that Lontra was primarily a gas-producing well, the
stock price fell more than 21% over the next two days. Plaintiffs have alleged that
when Cobalt issued corrective disclosures regarding the elevation of the SEC and DOJ
investigations regarding Nazaki’s ownership in August 2014, the stock price fell more

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than 11%. Similarly, Plaintiffs have alleged that when Cobalt disclosed in November
2014 that Loengo was a “dry well,” the stock price immediately declined 11.5% on
high volume trading. Based on Plaintiffs’ allegations in the Complaint, the factfinder
could reasonably infer that it is more probable than not that the corrective disclosures
caused at least a substantial portion of these episodes of price decline.
E.

Allegations of Reliance

Reliance is an element of Plaintiffs’ § 10(b) claim. To invoke the presumption
of reliance based on a “fraud-on-the-market” theory, a plaintiff must allege, inter alia,
that the security traded in an efficient market. See Halliburton Co. v. Erica P. John
Fund, Inc., 134 S. Ct. 2398, 2408 (2014). “Efficiency is a relative concept, a matter
of degree.” In re Enron Corp. Sec., 529 F. Supp. 2d 644, 750 (S.D. Tex. 2006).
There is no challenge to Plaintiffs’ allegation that the market for Cobalt
common stock was an efficient one. The Cobalt Defendants argue that Plaintiffs
failed to allege reliance as to the December 2012 and May 2014 bond offerings.
Plaintiffs respond that the Cobalt bonds offered in December 2012 and May 2014
were convertible bonds and, therefore, their market price necessarily tracked that of
the common stock.4

4

In their Reply, the Cobalt Defendants argue that Plaintiffs do not allege that the bonds
are convertible. In the Complaint, however, Plaintiffs clearly allege that the bonds
(continued...)

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Because the bonds were convertible to common stock, and because Plaintiffs
adequately alleged that there was an efficient market for the common stock, Plaintiffs
have alleged sufficient facts on the reliance factor for their § 10(b) claim as to the
bond offerings. See Argent Classic Convertible Arbitrage Fund L.P. v. Rite Aid
Corp., 315 F. Supp. 2d 666, 675 (E.D. Pa. 2004); Chu v. Sabratek Corp., 100 F.
Supp. 2d 815, 826 (N.D. Ill. 2000). The Cobalt Defendants’ Motion to Dismiss on
this basis is denied.
F.

Control Person Liability

The Cobalt Defendants argue that the § 20 and § 15 control person liability
claims must be dismissed because Plaintiffs have failed to allege a primary claim
under § 10(b) and § 11. As explained above, however, Plaintiffs have adequately
alleged their § 10(b) and § 11 claims. Therefore, the § 20 and § 15 claims are not
subject to dismissal.
G.

Conclusions On Cobalt Defendants’ Motion to Dismiss

The only issue before the Court at this time is whether the securities claims in
Plaintiffs’ Complaint are adequately alleged, not whether the claims are likely to
survive a motion for summary judgment following discovery. As discussed above,

4

(...continued)
offered in the December 2012 Bond Offering (¶ 232) and in the May 2014 Bond
Offering (¶ 252) were convertible.

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Plaintiffs have adequately alleged their Securities Act and Exchange Act claims
against the Cobalt Defendants.
IV.

UNDERWRITER DEFENDANTS’ MOTION TO DISMISS
Plaintiffs allege that the Underwriter Defendants violated Section 11 of the

Securities Act and Section 12(a)(2) of the Securities Act. Plaintiffs allege that each
of the Underwriter Defendants except Lazard Capital Markets, LLC (“Lazard”) served
as an underwriter for Cobalt’s February 2012 Stock Offering, that Goldman Sachs5
and Morgan Stanley & Co. LLC (“Morgan Stanley”) served as underwriters for the
December 2012 Bond Offering, that Morgan Stanley and Citigroup Global Markets
Inc. (“CGMI”) served as underwriters for the January 2013 Stock offering, that CGMI
served as an underwriter for the May 2013 Stock Offering, and that Goldman Sachs,
Credit Suisse Securities (USA) LLC (“Credit Suisse”), CGMI, RBC Capital Markets,
LLC (“RBC”), and Lazard served as underwriters for the May 2014 Bond Offering.
The Underwriter Defendants have moved to dismiss, asserting (1) that the
Securities Act claims based on the February 2012 Stock Offering are barred by the
three-year statute of repose; (2) that claims based on the statements regarding Nazaki
are barred by the one-year statute of limitations; (3) that Plaintiffs who purchased

5

Goldman Sachs is also sued as a Control Person pursuant to § 20 of the Exchange Act.
Its Motion to Dismiss the § 20 claims against it will be addressed below with the
Control Defendants’ Motions to Dismiss.

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shares after April 30, 2013, have failed to allege reliance in support of their § 11
claim, and (4) that Plaintiffs fail to allege that any of the Underwriter Defendants is
a “statutory seller” for purposes of the § 12 claim.6
A.

Statute of Repose

Section 11 claims are subject to a three-year statute of repose which provides
that “[i]n no event” shall an action be brought “more than three years after the security
was bona fide offered to the public.” 15 U.S.C. § 77m. In this case, Cobalt stock was
“bona fide offered to the public” on February 23, 2012. St. Lucie County Fire District
Firefighters’ Pension Trust Fund (“St. Lucie”) and Fire and Police Retiree Health Care
Fund, San Antonio (“San Antonio”) filed an original class action complaint on
November 30, 2014, prior to the expiration of the three-year statute of repose. The
Underwriter Defendants argue that the November 2014 complaint does not prevent
dismissal based on the statute of repose. Specifically, the Underwriter Defendants
argue that neither of the two named Plaintiffs in the November 2014 complaint had
standing to assert a Securities Act claim based on the February 2012 Stock Offering
because neither Plaintiff purchased stock in that offering. As explained below,

6

The Underwriter Defendants argue also that Plaintiffs’ Securities Act claims should
be dismissed for failure to allege adequately a material statement that was false or
misleading. For the reasons discussed above in connection with the Cobalt
Defendants’ Motion to Dismiss, dismissal on this basis is denied.

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however, the allegations in the Complaint establish for present purposes that St. Lucie
had standing on November 30, 2014, to assert the Securities Act claim based on the
February 2012 Offering.
“Section 11 of the Securities Act, imposing civil liability for public offering of
securities pursuant to a false registration statement, permits ‘any person acquiring
such security’ to sue.” Krim v. pcOrder.com, Inc., 402 F.3d 489, 495 (5th Cir. 2005)
(citing 15 U.S.C. § 77k(a)). Section 11’s “standing provisions limit putative plaintiffs
to the narrow class of persons consisting of those who purchase securities that are the
direct subject of the prospectus and registration statement.” Id. (internal quotations
and citation omitted). The plain language of the statute confers standing on any
person who acquires a security issued under the registration statement that allegedly
contained an untrue statement of material fact, “so long as the security was indeed
issued under that registration statement and not another.” Id. (emphasis in original);
see also Hopson v. Chase Home Fin. LLC, 14 F. Supp. 3d 774, 783 (S.D. Miss. 2014)
(citing Krim’s holding that § 11 provides a right of action to any person acquiring
shares issued pursuant to an untrue registration statement); In re Citigroup Inc. Bond
Litig., 723 F. Supp. 2d 568, 584 (S.D.N.Y. 2010) (holding that if a registration
statement contains an untrue statement of material fact, “then any person acquiring a
security pursuant to that registration statement has standing to sue a variety of

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participants in the security’s issuance” and citing 15 U.S.C. § 77k(a)); In re Azurix
Corp. Sec. Litig., 198 F. Supp. 2d 862, 892 (S.D. Tex. 2002) (holding that the term
“any person acquiring such security” in § 77k(a) includes “purchasers of shares issued
and sold pursuant to the challenged registration statement”).
In this case, Plaintiffs allege that the February 2012 Stock Offering that is the
subject of the Underwriter Defendants’ statute of repose challenge, and the
December 2012 Bond Offering in which St. Lucie purchased Cobalt securities, were
both conducted pursuant to the same January 2011 Registration Statement and
Prospectus. See Complaint, ¶¶ 223, 233. “The point of Article III standing . . . is to
ensure that the named plaintiff has a personal stake in the outcome of the litigation and
that the plaintiff purchases ‘securities’ as that term is defined in the Act issued
pursuant to a particular registration statement.” In re Fleming Cos. Inc. Sec. &
Derivative Litig., 2004 WL 5278716, *49 (E.D. Tex. June 16, 2004). Although
reserving and not deciding the issue, the First Circuit in Plumbers’ Union Local No.
12 Pension Fund v. Nomura Asset Acceptance Corp., a case cited by the Underwriter
Defendants, stated in dicta that a plaintiff could have standing “where the claims of
the named plaintiffs necessarily give them – not just their lawyers – essentially the
same incentive to litigate the counterpart claims of the class members because the
establishment of the named plaintiffs’ claims necessarily establishes those of other

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class members.” Plumbers’ Union, 632 F.3d 762, 770 (2d Cir. 2011). In the
November 2014 complaint, St. Lucie, as a purchaser in the December 2012 Bond
Offering, challenged statements in the January 2011 Registration Statement on which
both the December 2012 Bond Offering and the February 2012 Stock Offering were
based. Therefore, St. Lucie had the same incentive to litigate its challenge to the
subject Registration Statement as those purchasers of Cobalt stock in the
February 2012 Stock Offering.
Here, St. Lucie purchased Cobalt securities in an offering pursuant to the same
registration statement as any purchasers of Cobalt securities in the February 2012
Offering.7 Because St. Lucie had standing to sue based on the January 2011
Registration Statement, it has standing to assert class-based claims for all purchasers
of securities pursuant to that Registration Statement. St. Lucie’s original complaint
was filed on November 30, 2014, less than three years after the February 2012
Offering and within the statute of repose under the Securities Act. The policy
concerns and the language of the applicable cases convince the Court that St. Lucie

7

Universal Investment Gesellschaft m.b.h., a named Plaintiff in the Complaint filed
May 1, 2015, alleges that it purchased shares of Cobalt stock in the February 2012
Offering.

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had standing on November 30, 2014.8 The Underwriter Defendants’ Motion to
Dismiss claims based on the February 2012 Offering is, therefore, denied.
B.

Statute of Limitations

The Underwriter Defendants argue that the claims relating to statements about
the Nazaki’s ownership are barred by the applicable statute of limitations. Claims
under the Securities Act must be filed “within one year after the discovery of the
untrue statement or the omission, or after such discovery should have been made by
the exercise of reasonable diligence.” 15 U.S.C. § 77m; Police & Fire Ret. Sys. of
City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95, 107 (2d Cir. 2013); In re Magnum
Hunter Resources Corp. Sec. Litig., 616 F. App’x 442, 446-47 (2d Cir. June 23,
2015). “The one-year limitations period applicable to discovery of the violation
begins to run after the plaintiff obtains actual knowledge of the facts giving rise to the
action or notice of the facts, which in the exercise of reasonable diligence, would have
led to actual knowledge.” In re Petrobras Sec. Litig., __ F. Supp. 3d __, 2015 WL
4557364, *14 (S.D.N.Y. July 30, 2015) (quoting LC Capital Partners, LP v. Frontier
Ins. Grp., Inc., 318 F.3d 148, 154 (2d Cir. 2003)). Determining when a plaintiff has
sufficient information for the limitations period to begin is often fact specific and

8

As noted above, the GAMCO Plaintiffs, not St. Lucie, have been appointed Lead
Plaintiffs in this case.

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inappropriate for a motion to dismiss pursuant to Rule 12(b)(6). LC Capital, 318 F.3d
at 156.
In this case, Plaintiffs allege that it was reported in an article in the Financial
Times in April 2012 that senior Angolan officials admitted their ownership of Nazaki.
Plaintiffs allege also, however, that Cobalt representatives immediately denied any
alleged wrongdoing and stated that they had conducted rigorous due diligence
regarding Nazaki’s ownership. Plaintiffs allege that, days later, Morgan Stanley
issued a report advising that it was reassured by Cobalt’s statements in response to the
Financial Times article. Therefore, the Court cannot conclude as a matter of law that
the statute of limitations began to run in April 2012. It may have been, as Plaintiffs
argue, that they did not have adequate information for the statute of limitations to
begin until August 2014, when Cobalt announced that Angola had terminated
Nazaki’s participation in the partnership with Cobalt. Because it is plausible that the
allegations in the Complaint could support a finding that the statute of limitations did
not begin to run until August 2014, the Court cannot conclude at this pleading stage
that the claims relating to Nazaki’s ownership are time-barred.
C.

Section 11 Claim - Reliance

A plaintiff asserting a § 11 claim must allege (and eventually prove) reliance
on the misrepresentation in the registration statement if, and only if, the plaintiff

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“acquired the security after the issuer has made generally available to its security
holders an earning statement covering a period of at least 12 months beginning after
the effective date of the registration statement.” 15 U.S.C. § 77k(a). In this case,
Cobalt issued earnings statements between February 2012 and April 2013.9 The
Underwriter Defendants argue that, as a result, Plaintiffs who purchased Cobalt
securities after April 30, 2013, must allege reliance in support of their § 11 claim.
Plaintiffs argue first that Cobalt’s earning statements were not “earning
statements” for purposes of § 77k(a) because they continued to include the allegedly
false statements. The Court find this argument unpersuasive. The clear language of
the statute and the legislative history reflect that the term “earning statement” is
unqualified and should be given its general meaning.

See Petrobras, 2015

WL 4557364 at *15; H.R. CONF. REP. NO. 73-1838, 1934 WL 1291, *41 (1934)
(explaining that the “basis of this provision is that in all likelihood the purchase and
price of the security purchased after publication of such an earning statement will be
predicated on that statement rather than upon the information disclosed upon
registration.”).

9

Specifically, Cobalt issued a Q2 2012 Form 10-Q on July 31, 2012, a Q3 2012 Form
10-Q on October 30, 2012, a 2012 Form 10-K on February 26, 2013, and a Q1 2013
Form 10-Q on April 30, 2013. This “combination of reports” may be considered an
“earning statement” for purposes of § 77k(a). See 17 C.F.R. § 230.158(a)(2)(i).

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Plaintiffs argue also that they are entitled to rely on the “fraud-on-the-market”
theory of reliance to support their § 11 claim. Plaintiffs in the Complaint, however,
specifically allege that their reliance allegations, including those pertaining to the
“fraud-on-the-market” theory, “pertain only to Plaintiffs’ claim under the Exchange
Act.” See Complaint, ¶ 214.
Based on the current Complaint, Plaintiffs who purchased Cobalt securities
after April 30, 2013, must plead reliance on the alleged misrepresentations in issue,
in support of their § 11 claim. Having failed to do so, the § 11 claims of those
Plaintiffs are dismissed. The Court will, however, permit Plaintiffs to file a Second
Amended Consolidated Class Action Complaint by the deadline set forth below.
D.

Section 12 Claim - Underwriter Defendants as “Statutory Sellers”

The Underwriter Defendants argue that Plaintiffs lack standing to assert their
§ 12 claim. Section 12(a)(2) imposes liability on anyone who “offers or sells a
security . . . by the use of any means or instruments of transportation or
communication in interstate commerce or of the mails, by means of a prospectus or
oral communication, which includes an untrue statement of a material fact.” 15
U.S.C. § 77l. Only persons who “directly purchase securities from the defendant in
a public offering, rather than on the secondary market,” have standing to assert a claim
under § 12(a)(2). See Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 578 (1995).

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In this case, Plaintiffs adequately allege that they purchased their shares from
the Underwriter Defendants in the public offerings, rather than on a secondary market.
See Complaint, ¶¶ 312-316. As a result, dismissal of Plaintiffs’ § 12 claim against the
Underwriter Defendants is not appropriate and is denied.
E.

Conclusion as to Underwriter Defendants’ Motion to Dismiss

Plaintiffs’ Securities Act claims against the Underwriter Defendants are not
subject to dismissal at this stage of the proceedings as barred by either the three-year
statute of repose or the one-year statute of limitations. As to those Plaintiffs who
purchased shares of Cobalt stock after April 30, 2013, they will be granted leave to
amend to allege reliance, if such allegations comply with the requirements of Rule 11
of the Federal Rules of Civil Procedure. Plaintiffs have adequately alleged that they
purchased their shares from the Underwriter Defendants in the public offerings and,
therefore, dismissal based on the allegations in the Complaint would be inappropriate.
Consequently, the Underwriter Defendants’ Motion to Dismiss is granted with leave
to replead as to the § 11 claim by Plaintiffs who purchased their Cobalt securities after
April 30, 2013, and is denied in all other respects.
V.

CONTROL DEFENDANTS’ MOTION TO DISMISS
Plaintiffs allege that Goldman Sachs, Riverstone, Carlyle, First Reserve, and

Kern are liable as control persons under § 15 of the Securities Act for the violations

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of § 11 as alleged in the Complaint. Under § 15, any “person who, by or through
stock ownership, agency, or otherwise, . . . controls any person liable under [§ 11 of
the Securities Act], shall also be liable jointly and severally with and to the same
extent as such controlled person[.]” 15 U.S.C. § 77o. To state a § 15 claim for control
person liability, Plaintiffs must allege: (1) a primary violation of § 11 and/or § 12 of
the Securities Act; and (2) that the defendant exercised “control” over the primary
violator. See In re Dynegy, Inc. Sec. Litig., 339 F. Supp. 2d 804, 828 (S.D. Tex.
2004); see also In re Lehman Bros. Mortgage-Backed Sec. Litig., 650 F.3d 167, 185
(2d Cir. 2011); Howard v. Everex Sys., 228 F.3d 1057, 1065 (9th Cir. 2000).
By regulation, the SEC has defined “control” as the “possession, direct or
indirect, of the power to direct or cause the direction of management and policies of
a person, whether through ownership of voting securities, by contract, or otherwise.”
17 C.F.R. § 230.405. Control can also be established by “business relationships,
interlocking directors, family relations, or the power to influence and control the
activities of another.” In re Dynegy, 339 F. Supp. 2d at 828. A “plaintiff needs to
allege some facts beyond the defendant’s position or title that show the defendant had
actual power or control over the controlled person.” Id. (citing Dennis v. Gen.
Imaging, Inc., 918 F.2d 496, 509-10 (5th Cir. 1990)).

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There are no United States Supreme Court or Fifth Circuit decisions
establishing the pleading requirements for § 15. However, the Court finds persuasive
the reasoning of district courts in the Fifth Circuit that “apply a ‘relaxed’ and ‘lenient’
pleading standard for evaluating whether a plaintiff has sufficiently alleged a claim
for control person liability.” One Longhorn Land I, L.P. v. FF Arabian, LLC, 2015
WL 7432360, *2 (E.D. Tex. November 23, 2015) (citing Trendsetter Insurers, LLC
v. Hyperdynamics Corp., 2007 WL 172627, *15 (S.D. Tex. Jan. 18, 2007)). At the
pleading stage, “a plaintiff need only allege that [the defendant] possessed the power
to control the primary violator, not that control was exercised.” Id. at *3 (citing G.A.
Thompson & Co. v. Partridge, 737 F.2d 945, 957-58 (5th Cir. 1981)).
Whether a defendant is a control person is an intensely factual question, and
Plaintiffs here allege that Goldman Sachs, Riverstone, Carlyle, First Reserve, and
Kern together controlled Cobalt based, inter alia, on their significant stock ownership
and ability to elect a majority of Cobalt’s Board of Directors. Plaintiffs allege also
that the Control Defendants possessed the ability to control or influence Cobalt’s dayto-day operation because a Stockholder Agreement gave them the right to select a
majority of the members of every Board Committee except the Audit Committee.
Plaintiffs allege that the Control Defendants, except Carlyle, had one or two Managing
Directors serving simultaneously as a member of Cobalt’s Board. This gave the

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Control Defendants the power to influence those interlocking directors and, thereby,
control or influence the Cobalt Board.
Plaintiffs also cite to statements by Cobalt in filings with the SEC. For
example, in the Form 10-K for the fiscal year ending December 31, 2010, Cobalt
stated that its “four largest stockholders collectively own approximately 72% of
[Cobalt’s] outstanding stock” and “have significant influence over all matters that
require approval by [the] shareholders, including election of directors and approval
of significant corporate transactions.” In the same SEC filing, Cobalt identified itself
as a “controlled company” in which “more than 50% of the voting power is held by
another person or group of persons acting together.” The Form 10-K identified First
Reserve, Goldman Sachs, Riverstone, Carlyle, and Kern as the entities controlling a
majority of voting power. The next Form 10-K, for fiscal year ending December 31,
2011, included similar statements.
As noted above, the determination of whether a defendant is a control person
is highly fact intensive. Plaintiffs and Control Defendants have cited a variety of
district court cases that hold the plaintiffs there have or have not adequately alleged
§ 15 liability. Each one is similar to this case in certain respects and dissimilar in
others. The issue is currently before this Court on Motions to Dismiss at the pleading
stage. The Court is reviewing only Plaintiffs’ allegations and expresses no opinion

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regarding what the evidence may ultimately show. The Court finds that although the
allegations in the Complaint regarding control liability are limited, particularly as to
Defendant Carlyle, the allegations are sufficient to satisfy the notice pleading
requirements of Rule 8 and the PSLRA.
VI.

CONCLUSION AND ORDER
Based on the foregoing, it is hereby
ORDERED that the Underwriter Defendants’ Motion to Dismiss [Doc. # 81]

is GRANTED with leave to replead as to claims by Plaintiffs who purchased Cobalt
securities after April 30, 2013, and DENIED in all other respect. It is further
ORDERED that Plaintiffs shall file their Second Amended Class Action
Complaint by February 5, 2016. It is further
ORDERED that the Control Defendants’ Motion to Dismiss [Doc. # 82] is
DENIED. It is further
ORDERED that the Cobalt Defendants’ Motion to Dismiss [Doc. # 83] is
DENIED. It is further
ORDERED that Carlyle’s Motion to Dismiss [Doc. # 84] is DENIED.
SIGNED at Houston, Texas, this 19th day of January, 2016.

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NAN Y F. ATLAS
SENIOR UNI
STATES DISTRICT JUDGE