A Houston federal court recently held that neither an oil and gas company nor two of its directors were liable for federal securities fraud—and were not liable to shareholders—even though the company issued annual financial statements that (1) purportedly mischaracterized certain assets as unimpaired and (2) wrongfully overstated earnings for eight consecutive quarters.
The court said that the investors failed to allege the assets’ impairment was so obvious that the characterization was no longer within the confines of the business judgment of the company. And the court also said the earnings overstatements accounted for an aggregate drop in net earnings of only 1.2% over the applicable two-year period, which the court characterized as accounting mistakes. Without accompanying false statements or other aggravating circumstances, those accounting mistakes were not actionable as securities fraud.
The background to the lawsuit against the company, Harvest Natural Resources, begins in 2006, as set forth in Phillips v. Harvest Natural Resources, Inc., No. H-13-801, 2016 WL 4523849 (S.D. Tex. Aug. 25, 2016). For nearly 14 years prior, Harvest had been operating state-owned oilfields in Venezuela. But in 2006, after the Venezuela government declared all operating agreements illegal, Harvest converted its interest into a 40% ownership interest in Petrodelta, a Venezuela nationalized oil company. The conversion meant Harvest’s primary source of cash going forward would be dividends issued by Petrodelta.
Not long after the conversion, however, the Venezuela government interfered to Harvest’s financial detriment. The government demanded Harvest reinvest its cash into operations, oppressively taxed Harvest, reduced Harvest’s dividend from $93 million in 2008 to $12.2 million in 2010. A second dividend, announced in November 2010 for another $12.2 million, was never paid. Harvest repeatedly warned its investors about these developments. Harvest’s annual disclosures told investors that its primary source of income was Petrodelta dividends, that the November 2010 dividend had not been paid, that future dividend payments were not guaranteed, and that Harvest’s value was being eroded by problems with Petrodelta and the Venezuelan government. Despite this outlook, however, Harvest’s annual financial disclosures listed Petrodelta’s unpaid dividend and Petrodelta’s value as unimpaired assets.
Harvest, wanting to get out of Venezuela, announced its intent to...
