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IN RE WRT ENERGY SECURITIES LITIGATION

February 8, 2005.

In re WRT ENERGY SECURITIES LITIGATION.


The opinion of the court was delivered by: JOHN KEENAN, Senior District Judge

OPINION AND ORDER

Before the Court are the motions to dismiss Plaintiffs' Fourth Amended Consolidated Class Action Complaint (the "Complaint"), pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b), of defendants Steven S. McGuire, Samuel C. Guy, Ronald E. Hale, Jr., Dominic Man-Kit Lam and James T. Rash (collectively, the "Individual Defendants"), and defendants Oppenheimer & Co., Inc. ("Oppenheimer") and Schroder & Co., Inc. ("Schroder") (collectively, the "Underwriter Defendants"). For the reasons set forth below, the motions are granted in part and denied in part.

PROCEDURAL HISTORY

  Plaintiffs commenced these consolidated actions on December 18, 1995 by filing two separate class action complaints in the United States District Court for the Southern District of California. Those actions subsequently were consolidated by Stipulation and Order dated May 2, 1996, and transferred to this Court by Order of United States District Judge Barry T. Moskowitz dated May 7, 1996.

  Plaintiffs filed an Amended Complaint on July 26, 1996 and a Second Amended Complaint on October 25, 1996. These complaints alleged claims under both the Securities Act of 1933 ("1933 Act") and the Securities Exchange Act of 1934 ("1934 Act"). The Court dismissed the 1933 Act claims on standing Page 2 grounds because Plaintiffs did not allege that they purchased their securities in a public offering. In re WRT Energy Sec. Litig., No. 96 Civ. 3610 (JFK), 96 Civ. 3611 (JFK), 1997 WL 576023 at *7 (S.D.N.Y. Sep. 15, 1997). The Court dismissed the 1934 Act claims on Rule 9(b) grounds. Id. at *12.

  Plaintiffs, who had leave to replead, filed a Third Amended Consolidated Class Action Complaint that again alleged 1933 Act and 1934 Act violations. The Court dismissed the 1933 Act claims on standing grounds once again, and dismissed the 1934 Act claims on Rule 9(b) grounds with respect to some, but not all, of the defendants. In re WRT Energy Sec. Litig., No. 96 Civ. 3610 (JFK), 96 Civ. 3611 (JFK), 1999 WL 178749, at *1 (S.D.N.Y. Mar. 31, 1999). This time, the Court denied leave to replead the dismissed claims. Id. at *15.

  On June 18, 2002, Plaintiffs dismissed their 1934 Act claims against the remaining defendants. Plaintiffs then appealed the Section 11 standing dismissals to the Second Circuit. While the appeal was pending, the Circuit held in DeMaria v. Anderson, 318 F.3d 170 (2d Cir. 2003), that aftermarket purchasers who can trace their securities to an allegedly misleading registration statement have standing to bring claims under Section 11 of the 1933 Act. Id. at 178. Based on DeMaria, the Circuit vacated the standing dismissals and remanded the 1933 Act claims to this Court for consideration of Page 3 the merits. In re WRT Energy Sec. Litig., 75 Fed. Appx. 839, 2003 WL 22221341 (2d Cir. 2003). Plaintiffs asserted these claims, but no 1934 Act claims, in their Fourth Class Action Complaint, filed on February 23, 2004. The Individual and Underwriter Defendants now move to dismiss.*fn1

  FACTUAL BACKGROUND

  A. Introduction

  This action, which has outlasted a New York Yankees dynasty, was brought on behalf of a putative class of individuals who purchased securities of the now-insolvent WRT Energy Corporation ("WRT") from October 20, 1993 through October 27, 1995 (the "Class Period"). The latest allegations focus on two transactions: (1) a preferred stock offering that commenced on October 20, 1993, and (2) a senior notes offering that commenced on February 28, 1995. During the Class Period, McGuire was Chairman of the Board and Chief Executive Officer of WRT, Guy was a Director of WRT and its Executive Vice President, Hale was WRT's Chief Financial Officer, and Lam and Rash were Directors of WRT. Oppenheimer and Schroder were co-underwriters of the 1995 senior notes offering. Page 4

  The facts alleged in the Complaint, accepted as true for purposes of the instant motions, are as follows. WRT was an oil and gas producer which specialized in acquiring and revitalizing "mature" oil and gas fields located primarily in Southern Louisiana. (Compl. ¶ 2).*fn2 WRT claimed that it could exploit the natural resources in these fields, where previous owners had failed, through the use of unique technology used to revitalize non-productive oil and gas wells. (Id. ¶ 3).

  On October 20, 1993, WRT commenced a public offering of approximately 1.1 million shares of preferred stock at $25 per share, for which WRT received approximately $25 million in proceeds. (Id. ¶ 20). Defendants McGuire and Hale signed the registration statement for this offering. (Id.). On February 28, 1995, WRT commenced a senior notes offering of 100,000 Units at $1000 per Unit, yielding $100 million. (Id. ¶ 27).*fn3 All of the Individual Defendants signed the registration statement for this offering, and Oppenheimer and Schroder acted as co-underwriters. (Id.). Plaintiffs claim that the registration statements contained material misstatements and omissions of fact. Generally, Plaintiffs' claims of wrongdoing in the Registration Page 5 Statements fall into two categories: (1) the overstatement and/or exaggeration of the success WRT had in its revitalizing activities, a core aspect of WRT's business, and (2) the misrepresentation of the WRT's technological capacities. (See id. ¶¶ 21-22, 30-31).

  B. WRT's Revitalization Activities

  Plaintiffs claim that the Preferred Stock Offering Registration Statement ("PRS") incorrectly stated that WRT had "demonstrate[d] its ability to use its technology to find previously untapped reservoirs in shut-in or abandoned wells and return such wells to commercial production"; that WRT had finished workovers of four wells in its West Hackberry Field and that all of them were "commercially productive"; and that WRT had experienced success in 24 of 31 recompletions, 57 of 69 newly drilled wells and 15 of 21 repaired wells in West Cote Blanche Bay Field." (Id. ¶ 22).

  Plaintiffs allege that the Senior Notes Offering Registration Statement ("SRS") essentially repeated many of the incorrect statements in the PRS. For example, Plaintiffs point to statements that WRT employed a "technology-based approach to oil and gas development"; that "[a]pplication of the Company's technologies to its existing properties has resulted in substantial increases in overall production rates, oil and gas reserves and cash flow"; that WRT "had a 84% success rate in Page 6 identifying and developing commercial reservoirs in shut-in wells" since 1987; and that WRT experienced 14 of 16 successful revitalizations in East Hackberry Field. (Id. ¶ 30). Plaintiffs further allege that the SRS repeated the West Hackberry Field successes (detailed above) and described the West Cote Blanche Bay successes (also detailed above) as "a representative example" of how the Company could identify and exploit untapped production from shut-in or abandoned wells. (Id.).

  These glowing statements, according to Plaintiffs, failed to comport with unrevealed realities concerning WRT's successes. The Complaint alleges that "the majority of these wells were failures because they did not pay back the drilling and/or revitalization costs"; that "WRT's drilling and revitalization efforts were never successful"; and that "no more than 40% of WRT's wells were economic successes" during the Class Period. (Id. ¶ 36). Plaintiffs attempt to confirm these claims by reference to internal memoranda prepared by WRT's geological consultant, the Scotia Group ("Scotia"),*fn4 dated June 2, 1994, February 1995, and July 17, 1995 (see id. ¶¶ 37, 45), and WRT's reserve reports (see id. ¶¶ 38-40).

  Plaintiffs allege that the reserve reports paint a far dimmer picture of WRT's revitalizations than the registration statements. With respect to the 31 wells in West Cote Blanche Page 7 Bay Field, Plaintiffs allege that the actual number of "economic" successes was 13, not 24. (Id. ¶ 40). The Complaint gives examples of 18 so-called "successes" that were revitalized or reworked between September 1988 and November 1991. According to Plaintiffs, the data show that the wells did not recoup the day-to-day operational costs, let alone the capital costs of the revitalizations. (Id. ¶¶ 40-41). West Hackberry allegedly performed even more poorly: 3 of 17 successful workovers in 1993. (See id. ¶ 42). As for East Hackberry, the SRS stated that this field increased oil production by 100% since the purchase of one property in February 1994 and the commencement of a workover on a second property in June 1994. (Id. ¶ 43). Plaintiffs note, however, that the SRS did not disclose that "WRT spent approximately $5.1 million on the workovers through December 1994, an inordinately high figure, and these costs continued to escalate" and that "[t]he additional production realized from the workovers in this field were [sic] insufficient to cover these expenses and all of the workovers were colossal failures." (Id.).

  Plaintiffs further claim that WRT's drilling and revitalization efforts "were never successful." (Id. ¶ 44). In essence, Plaintiffs allege that several wells produced at low levels (if at all) or only for short times, despite the revitalizations and workovers, without paying back costs. These workovers or restorations, which were completed between July 1994 Page 8 and January 1995 (before the senior notes offering), involved wells in the West and East Hackberry Fields and Lac Blanc Field. (Id. ¶ 44(a)). Plaintiffs also allege failures after the senior notes offering in the West Hackberry and Bayou Penchant Fields. (Id. ¶ 44(b)).

  C. WRT's Technological Capabilities

  Three varieties of technology are at issue in this case: logging tools, a computerized database, and hydrocyclone fluid separation equipment. Plaintiffs allege that the PRS incorrectly stated that WRT was "the only independent oil and gas company" with the tools to "log cased wells" ("logging tools"), giving WRT operational, competitive and scheduling advantages; that WRT's proprietary computerized database made WRT "better able to evaluate and target suitable acquisitions"; and that the application of advanced hydrocyclone fluid separation equipment "significantly improved production rates in many of the wells to which they have been applied by [WRT]." (Id. ¶¶ 22-26). Plaintiffs say that the PRS gave only one example of a successful employment of the hydrocyclone process: Tigre Lagoon Delcambre #1 well, which the PRS said increased its daily production tenfold in the two years following its workover. (Id. ¶ 26).

  The Complaint further alleges that the SRS, like the PRS, misrepresents the advantages of WRT's logging tools, proprietary computerized database and hydrocyclone equipment. Page 9 (Id. ¶¶ 32-34). The allegations here are essentially the same as before. The only major addition is with respect to the hydrocyclone equipment. Plaintiffs allege that the SRS includes a statement that Lac Blanc Field had been plagued by excess saltwater concentrations, and the application of hydrocyclone equipment resulted in better than a 200% increase in gas production. (See id. ¶ 34).

  Plaintiffs claim that WRT's advanced proprietary technology was neither advanced nor advantageous. The Complaint refers to one Scotia report, which found that WRT had a "smoke and mirrors approach to technical work" and that WRT "was neither especially high-tech nor at this point in time, efficient." (Id. ¶ 45). Plaintiffs contend that it would have been more cost-efficient to hire a large oil service company with the most technologically advanced equipment, rather than own logging equipment that would become obsolete. (Id. ¶¶ 46-47). Plaintiffs also claim that WRT's proprietary computerized database contained only well logs and historical production, reworking and drilling records — all of which were in the public domain. (Id. ¶ 48). Finally, Plaintiffs allege that WRT's hydrocyclone technology was purchased from third parties and completely accessible to WRT's competitors. (Id. ¶ 49). Page 10

  D. WRT Collapses

  Plaintiffs claim that the matters incorrectly stated in the PRS and SRS adversely affected WRT's operations. (Id. ¶ 51). The preferred stock, which had closed at $28.25 on October 28, 1993, had fallen to $9.00 per share by October 26, 1995. The next day, October 27, 1995, WRT announced that it could no longer "support [its] 1995 capital requirements and fund existing debt service and dividends payable on preferred stock." (Id. ¶ 51). The preferred stock closed at $8.25 that day, and then dropped to $5.50 on October 30, 1995. The senior notes fared no better, falling from $98.50 on August 28, 1995, to $68.00 on October 27, 1995, and to $50.00 on November 24, 1995. (Id. ¶ 52).

  On November 14, 1995, WRT issued its quarterly report, which was signed by Hale. The report disclosed that "it is unlikely that [WRT] will have sufficient cash to meet the . . . interest payment on the Senior Notes," that WRT doubted if it could continue as a "going concern" if current conditions persisted, and that McGuire and Guy had resigned on November 10, 1995. (Id. ¶ 53). WRT filed a Chapter 11 petition for bankruptcy on February 14, 1996. (Id. ¶ 54). As a result of ...


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