IN RE: COBALT INTERNATIONAL ENERGY, INC. SECURITIES LITIGATION

Filing 125

MEMORANDUM AND ORDER denying [117, 118, 120] Motions to Certify Order for Interlocutory Appeal.(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

§
§
§

March 14, 2016
David J. Bradley, Clerk

CIVIL ACTION NO. H-14-3428

MEMORANDUM AND ORDER
This securities case is before the Court on the Motions to Certify Order for
Interlocutory Appeal (“Motions to Certify”) filed by Defendants Goldman Sachs
Group, Inc., Riverstone Holdings LLC (“Riverstone”), First Reserve, ACM Ltd., and
The Carlyle Group L.P. (collectively, “Control Defendants”) [Doc. # 117]; by 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”) [Doc. # 118]; and 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

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Securities LLC, Howard Weil Incorporated, Stifel, Nicolaus & Company,
Incorporated, Capital One Southcoast, Inc., and Lazard Capital Markets LLC
(collectively, “Underwriter Defendants”) [Doc. # 120]. Pursuant to 28 U.S.C.
§ 1292(b), Defendants seek certification of the Court’s Memorandum and Order [Doc.
# 108] entered January 19, 2016.1
Plaintiffs filed an Omnibus Opposition [Doc. # 121], and a Reply was filed by
the Control Defendants [Doc. # 122], the Underwriter Defendants [Doc. # 123], and
the Cobalt Defendants [Doc. # 124]. The Court has reviewed the record, including its
January 19, 2016 Memorandum and Order. Based on this review, consideration of the
parties’ arguments, and the application of binding and persuasive legal authorities, the
Court denies the pending Motions to Certify.
I.

BACKGROUND
The factual background of this lawsuit was set forth fully in the Court’s January

19, 2016 Memorandum and Order. Briefly, Cobalt is an exploration and production
company that was formed in 2005 as a private company. Cobalt conducted an initial
public offering (“IPO”) of its shares in December 2009.

1

Section 1292(b) allows the Court to certify for interlocutory appeal a non-final order
if the Court finds that the order “involves a controlling question of law as to which
there is substantial ground for difference of opinion and that an immediate appeal
from the order may materially advance the ultimate termination of the litigation.” 28
U.S.C. § 1292(b).

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Previously, in 2007, Cobalt had entered into an agreement with Sonangol E.P.
(“Sonangol”), the Angolan national oil company, to acquire a 40% interest in oil
exploration Blocks 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”).
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 January 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 engaged
in formal investigations into whether Cobalt had violated the Foreign Corrupt
Practices Act of 1977. The SEC investigation terminated in January 2015 with no
recommendation for enforcement action against Cobalt. The DOJ investigation is
ongoing.

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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 filed a Class Action 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 filed a Complaint [Doc. # 1 in Civil
Action No. H-14-cv-3488], alleging violations of the Securities Act and the Exchange
Act. By Orders [Docs. # 67 and # 68] entered March 3, 2015, the Court consolidated
the two civil cases and appointed lead Plaintiffs.
On May 1, 2015, Plaintiffs filed their Consolidated Amended Class Action
Complaint (“Complaint”) [Doc. # 72], asserting claims under the Exchange Act and
the Securities Act. Defendants filed Motions to Dismiss, which were denied in most
respects in the January 19, 2016 Memorandum and Order.
Defendants have now filed their Motions to Certify the January 19, 2016
Memorandum and Order for interlocutory appeal. The Motions to Certify have been
fully briefed and are ripe for decision.
II.

APPLICABLE LEGAL STANDARD
Certification of an interlocutory appeal from an order is permitted if the district

court is “of the opinion that such order involves a controlling question of law as to
which there is substantial ground for difference of opinion and that an immediate

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appeal from the order may materially advance the ultimate termination of the
litigation.” Nguyen v. Am. Comm. Lines, L.L.C., 805 F.3d 134, 137-38 (5th Cir. 2015)
(quoting 28 U.S.C. § 1292(b)). “Interlocutory appeals are generally disfavored, and
statutes permitting them must be strictly construed.” Mae v. Hurst, 613 F. App’x 314,
318 (5th Cir. June 2, 2015) (quoting Allen v. Okam Holdings, Inc., 116 F.3d 153, 154
(5th Cir. 1997)). “Section 1292(b) appeals are exceptional.” Derrick Petroleum
Servs. v. PLS, Inc., 2015 WL 224991, *2 (S.D. Tex. Jan. 15, 2015) (quoting ClarkDietz & Assocs. v. Basic Constr. Co., 702 F.2d 67, 69 (5th Cir. 1983)).
General standards for § 1292(b) certification that have commonly been
identified by courts include: (1) “the decision to permit such an appeal is firmly
within the district court’s discretion;” (2) the statute “is not a vehicle to question the
correctness of a district court’s ruling or to obtain a second, more favorable opinion;”
(3) “the issue for appeal must involve a question of law – not fact” and a “‘question
of law’ does not mean the application of settled law to disputed facts;” (4) the “issue
for appeal must involve a controlling question of law;” (5) permitting an interlocutory
appeal must “speed up the litigation;” and (6) “there must be substantial ground for
difference of opinion over the controlling question of law for certification under
§ 1292(b).” See Ryan v. Flowserve Corp., 444 F. Supp. 2d 718, 722-23 (N.D. Tex.
2006) (emphasis in original). “District courts have unfettered discretion to deny

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certification, even when all [statutory criteria] are satisfied.” Nieman v. City of
Dallas, 2016 WL 470235, *3 (N.D. Tex. Feb. 8, 2016) (Lynn, J.); see also Jackson
v. Caribbean Cruise Line, Inc., 88 F. Supp. 3d 129, 141 (E.D.N.Y. 2015); Villareal
v. Caremark LLC, 85 F. Supp. 3d 1063, 1068 (D. Ariz. 2015).
III.

ANALYSIS
A.

Controlling Question of Law

The first requirement for certification under § 1292(b) is that the issue for
appeal must involve a controlling question of law. A “controlling question of
law – although not consistently defined – at the very least means a question of law the
resolution of which could materially advance the ultimate termination of the
litigation – thereby saving time and expense for the court and the litigants.” Ryan, 444
F. Supp. 2d at 723.
Control Defendants.— The Control Defendants seek certification of the
following issues for interlocutory appeal:
1.

Whether a complaint can state a claim for control-person liability
merely by alleging that a private-equity sponsor owned a minority
of a company’s shares and appointed a minority of the company’s
board.

2.

In the absence of any allegations that separate private-equity
sponsors acted jointly to control the primary defendant, whether
such separate sponsors may be treated as a group for purposes of
determining whether a complaint states a control-person claim
against each of them.

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Control Defendants’ Motion to Certify, p. 6.
In the January 19, 2016 Memorandum and Order, the Court set forth the
requirements for § 15 control person liability, noting that the SEC defines “control”
to mean 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.” Memorandum and Order, p. 29 (citing 17
C.F.R. § 230.405). The Court noted that control can be established by “business
relationships, interlocking directors, family relations, or the power to influence and
control the activities of another.” Id. (citing In re Dynegy, Inc. Sec. Litig., 339 F.
Supp. 2d 804, 828 (S.D. Tex. 2004)). The Court stated specifically that 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. at 29-30
(citations omitted). The Court noted further that whether a defendant is a § 15 control
person “is an intensely factual question.” Id. at 30, 31. The Court found that
Plaintiffs in this case alleged facts beyond the Control Defendants’ positions by
alleging, inter alia, “that the Control Defendants possessed the ability to control or
influence Cobalt’s day-to-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” and that Cobalt stated in SEC filings that its “four largest
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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.” Id. at 30-31.
The Court finds that the issues the Control Defendants want certified for
interlocutory appeal are not controlling questions of law but are, instead, issues
regarding the Court’s application of established legal principles to the factual
allegations in this lawsuit. As a result, the Control Defendants have failed to satisfy
the first requirement for § 1292(b) certification, and their Motion to Certify is denied.
Cobalt Defendants.— The Cobalt Defendants seek certification of the
following issues for interlocutory appeal:
1.

Even if a complaint identifies a confidential witness (“CW”) by
his or her job title, responsibilities, and tenure, must a district
court analyze at the motion to dismiss stage whether the complaint
adequately pleads that the CW could have personal knowledge of
each allegation he or she makes before deciding whether to credit
those allegations . . .?

2.

Must a district court analyze at the motion to dismiss stage the
reliability and accuracy of articles and their underlying sources to
determine whether they satisfy the [applicable pleading
standards]?

Cobalt Defendants’ Motion to Certify, p. 1.

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In their Motion to Dismiss, the Cobalt Defendants asked the Court to disregard
allegations based on information from confidential witnesses and various published
articles. In the January 19, 2016 Memorandum and Order, the Court noted correctly
that courts often discount allegations from confidential sources. Memorandum and
Order, p. 8 (citing Ind. Elec. Workers’ Pension Trust Fund v. Shaw Group, Inc., 537
F.3d 527, 535 (5th Cir. 2008)). The Court then stated, however, that in this case, “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.” Id. (emphasis
added).
With reference to the published articles cited by Plaintiffs in support of the
allegation that the Cobalt Defendants had knowledge that Nazaki and Alper were
owned by Angolan government officials, the Court noted that the content of the
articles was properly alleged and that the articles provided only one source of
evidentiary support of the claim that the Cobalt Defendants made false or misleading
statements. Id. at 9.
The issues that the Cobalt Defendants ask this Court to certify for interlocutory
appeal are not controlling questions of law. Instead, they are issues regarding the
Court’s application of established legal principles to the factual allegations in this
lawsuit. Additionally, with reference to the published articles, the issue would not be

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controlling because there were other allegations to support Plaintiffs’ assertion that
the Cobalt Defendants had knowledge of the relationship among Nazaki, Alper, and
the Angolan government officials. As a result, the Cobalt Defendants have failed to
satisfy the first requirement for § 1292(b) certification, and their Motion to Certify is
denied.
Underwriter Defendants.— The Underwriter Defendants seek certification of
the following question for interlocutory appeal:
Whether a Securities Act claim is timely under its three-year statute of
repose, where it is brought by a person who purchased different
securities in a different offering, and where the different offering was
based on the same shelf registration statement filed more than three years
prior to suit.
Underwriter Defendants Motion to Certify, p. 3. Plaintiffs concede, and the Court
agrees, that this is a controlling question of law as to the statute of repose defense.
B.

Substantial Ground for Difference of Opinion

The second requirement for certification under § 1292(b) is that there is a
substantial ground for difference of opinion regarding the controlling question of law.
“[C]ourts have found substantial ground for difference of opinion where a trial court
rules in a manner which appears contrary to rulings of all Courts of Appeals which
have reached the issue, if the circuits are in dispute on the question and the Court of
Appeals of the circuit has not spoken on point, if complicated questions arise under

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foreign law, or if novel and difficult questions of first impression are presented.”
Ryan, 444 F. Supp. 2d at 723-24 (internal quotation and citation omitted); Ministry of
Oil of the Republic of Iraq v. 1,032,212 Barrels of Crude Oil, 2015 WL 851920, *2
(S. D. Tex. Feb. 26, 2015). “But simply because a court is the first to rule on a
question or counsel disagrees on applicable precedent does not qualify the issue as one
over which there is substantial disagreement.” Ryan, 444 F. Supp. 2d at 724; see also
Ministry of Oil, 2015 WL 851920 at *2.
As noted above, the Control Defendants and the Cobalt Defendants have not
raised issues that are ready for presentation. All of the questions they identify are
fact-intensive, not suitable for disposition on the pleadings. The issue posed by the
Underwriter Defendants, however, warrants a closer evaluation on the question of
“substantial ground for difference of opinion.”
In the January 19, 2016 Memorandum and Order, the Court held that the
allegations in Plaintiffs’ Complaint established for purposes of a motion to dismiss
that St. Lucie had standing when it filed its Class Action Complaint on November 30,
2014, to assert the Securities Act claim based on Cobalt’s February 2012 Offering.
The Court held that St. Lucie had standing because it purchased Cobalt securities in
the December 2012 Bond Offering that was based on the same January 2011

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Registration Statement and Prospectus as the February 2012 Offering.

See

Memorandum and Order, pp. 21-24.
Although the statute of repose issue is a controlling question of law, the Court
does not find that there exists a substantial ground for difference of opinion. The Fifth
Circuit has held that 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.” Krim v. pcOrder.com, Inc., 402
F.3d 489, 495 (5th Cir. 2005). Other federal courts of appeals have held the same.
See, e.g., DeMaria v. Andersen, 318 F.3d 170, 175 (2d Cir. 2003) (holding that § 11
provides a cause of action for any person who acquired a security issued pursuant to
a materially false registration statement); Lee v. Ernst & Young, LLP, 294 F.3d 969,
976-77 (8th Cir. 2002) (stating that a § 11 plaintiff need only have purchased
securities that were “originally registered under the allegedly defective registration
statement – so long as the security was indeed issued under that registration statement
and not another”).
The Underwriter Defendants’ reliance on the First Circuit’s decision in
Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., is
unpersuasive. In that case, none of the named plaintiffs had purchased certificates
issued by the defendants. See Plumbers’ Union, 632 F.3d 762, 768 (2d Cir. 2011).

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As a result, the First Circuit held that the plaintiffs lacked standing – with a
qualification. Id. at 770. The “qualification,” described by the First Circuit in dicta,
was 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 class members.” Id.
That is the case here. 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 allegedly false Registration Statement as those
purchasers of Cobalt stock in the February 2012 Stock Offering.
The Fifth Circuit in Krim addressed the issue that the Underwriter Defendants
want certified. The Fifth Circuit’s decision in Krim is consistent with decisions by
other courts of appeals, including the Second and the Eighth Circuits. The First
Circuit’s decision in Plumbers’ Union is not inconsistent with the Fifth Circuit’s Krim
decision and, therefore, does not demonstrate substantial ground for difference of
opinion. The Underwriter Defendants have failed to satisfy the second requirement

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for § 1292(b) certification of an interlocutory appeal, and their Motion to Certify is
denied.
C.

Materially Advance the Ultimate Termination of the Litigation

The third requirement for certification under § 1292(b) is that the interlocutory
appeal will materially advance the ultimate termination of the litigation. Indeed, the
“institutional efficiency of the federal court system is among the chief concerns
motivating § 1292(b).” Ryan, 444 F. Supp. 2d at 723. None of the moving
Defendants has satisfied this element.
As to the questions raised by the Control Defendants and the Cobalt
Defendants, an interlocutory appeal is unlikely to advance the ultimate termination of
the lawsuit because, even if successful, the appeal will likely result in remand to this
Court for Plaintiffs to have an opportunity to replead. Therefore, an interlocutory
appeal – even a successful one – will delay rather than advance final resolution of this
dispute.
As to the question raised by the Underwriter Defendants, a successful appeal
would materially advance the termination of the lawsuit as to only a few of the
Defendants. On this basis, also, the Court finds that an interlocutory appeal would not
materially advance the final resolution of this lawsuit. See, e.g., ExxonMobil Corp.
v. U.S., 108 F. Supp. 3d 486, 516 (S.D. Tex. 2015).

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As to the questions raised by all Defendants, those issues can be appealed, if
appropriate, after all remaining issues have been resolved. The Court has handled,
and will continue to handle, this case expeditiously. The case will progress efficiently
to final resolution, at which time all disputed issues can be raised in one appeal rather
than piecemeal.
IV.

CONCLUSION AND ORDER
As explained above, Defendants have failed to satisfy the three requirements

for certification of an interlocutory appeal pursuant to 28 U.S.C. § 1292(b). In any
event, the Court does not find that this is an exceptional case that would benefit from
an interlocutory appeal. Therefore, in the exercise of this Court’s discretion, it is
hereby
ORDERED that the Motions to Certify Order for Interlocutory Appeal [Docs.
# 117, # 118, and # 120] are DENIED.
SIGNED at Houston, Texas, this 14th day of March, 2016.

NAN Y F. ATLAS
SENIOR UNI
STATES DISTRICT JUDGE

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