Yoshikawa v. Exxon Mobil Corp.

MENDI YOSHIKAWA, et al., Plaintiffs, v. EXXON MOBIL CORP., et al., Defendants.

Civil Action No. 3:21-CV-00194-N

United States District Court, N.D. Texas, Dallas Division

September 29, 2022

MEMORANDUM OPINION AND ORDER

David C. Godbey, Chief United States District Judge

This Order addresses Defendants' Motion to Dismiss filed on November 24, 2021 [69]. For the reasons stated below, the Court grants the motion and gives Plaintiffs leave to amend if it is possible to do so, in a manner consistent with this opinion.

I. The Origins of the Dispute

This is a federal securities putative class action on behalf of all persons and entities who purchased or otherwise acquired Exxon Mobil Corp. (“ExxonMobil”) common stock (“XOM”) between March 7, 2018 and January 15 2021 (the “Class Period”). See Amended Complaint 1-2 [53] (“Compl.”). In January 2017, ExxonMobil purchased additional oil and gas assets in the Permian Basin in January 2017, and it announced an “aggressive growth strategy” for the region in 2018. Compl. ¶¶ 3, 49, 51, 54-56. Throughout 2018 and 2019, ExxonMobil forecast strong progress toward its goal of producing 1 million oil-equivalent-barrels per day in the Permian by 2024. Id. ¶¶ 232, 238, 350, 400, 405, 415, 425. But on January 31, 2020, ExxonMobil disclosed that Permian barrel-per-day production was essentially flat quarter-over-quarter, and in May 2020, it announced infrastructure and expenditure cuts in the region. Id. ¶¶ 439, 444. On January 15, 2021, the Wall Street Journal reported that the SEC was investigating ExxonMobil's valuation of its Permian Basin assets in response to a fall 2020 whistleblower complaint. Id. ¶ 448. The XOM price per share dropped 4.1, 7.2, and 4.8 percent immediately following each respective announcement. Id. ¶¶ 440, 445, 449.

Plaintiffs^[1] bring suit under Section 10(b) of the Securities and Exchange Act and Rule 10b-5 against ExxonMobil and several of its personnel, Darren Woods, Neil Chapman, Jack Williams, Neil Hansen, David Rosenthal, Liam Mallon, Jeffrey Woodbury, and Sara Ortwein (the “Individual Defendants”). Plaintiffs also bring suit under section 20(a) of the Securities and Exchange Act against Woods, Rosenthal, and Chapman as control persons of Exxon. Plaintiffs allege that Defendants committed securities fraud by both affirmatively misrepresenting the success of its Permian Basin drilling project and omitting material information about the project's obstacles.

A. Statements that Production Goals Were “On Track”

Over the course of the Class Period, Defendants stated several times that ExxonMobil was “on track,” “on plan,” or “on schedule” to meet its 2024 1-million-barrel goal. Id. ¶¶ 232, 238, 350, 400, 405, 415, 425. Plaintiffs contend that these statements were misleading because there were numerous problems with the Permian project that made ExxonMobil's 2024 goal impossible. Id. ¶¶ 166-70.

B. Statements Regarding Proved Reserves

ExxonMobil several times attributed increases of its Proved Reserves to its Permian Basin activity. Id. ¶¶ 54, 140, 235. The Generally Acceptable Accounting Principles (“GAAP”) and SEC regulations specify how to determine Proved Reserves; Plaintiffs allege that Defendants intentionally inflated ExxonMobil's Proved Reserve calculations by using overly optimistic assumptions about drilling time. Id. ¶¶ 60-62.

C. Statements Regarding the Permian Resource Base

Defendants also made several statements about ExxonMobil's Permian Resource Base, which is its proved reserves “plus other discovered resources that are expected to be ultimately recovered.” Id. ¶¶ 90, 138, 145. Plaintiffs contend that Defendants knowingly published misleading Resource Base estimates based on the erroneous drilling time assumptions and never properly revised them down. Id. ¶¶ 124-27, 138-40, 177.

D. Statements and Omissions Regarding Production Conditions

Defendants often made statements about ExxonMobil's processes and assets in general terms, such as describing its position as “unique,” announcing “increased” drilling, or calling its wells “the best.” Id. ¶¶ 355, 359, 233. Plaintiffs allege that these statements, coupled with a failure to disclose the project's obstacles, created a false impression of success in the Permian. Id. ¶¶ 362, 404, 418, 435.

E. Failure to Disclose Additional Information Alongside Data Presentations

During a 2018 Analyst Meeting, Defendants displayed a chart comparing ExxonMobil's U.S. production to that of its competitors and presented that it demonstrated its “unique position in getting value out of the Permian.” Plaintiffs argue that the slide was misleading because it included non-Permian data and failed to state that competitors performed better than ExxonMobil in drilling time, production, well performance, and well quality. Id. ¶¶ 57, 81-88, 356.

F. The Motion to Dismiss

Defendants move to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) on several grounds, including the following: (1) Plaintiffs have engaged in impermissible group pleading, failing to allege scienter adequately as to each Defendant; (2) the “on track” statements are protected by the Private Securities Litigation Reform Act's (“PSLRA”) safe harbor provision, 15 U.S.C. § 78u-5; (3) Plaintiffs have not pleaded with particularity that the Proved Reserves or Resource Base figures were incorrect; and (4) its generic statements about processes and assets were “soft” statements that are immaterial.

II. Plaintiffs Have Not Created a Strong Inference of Scienter

Federal Rule of Civil Procedure 9(b) requires complaints alleging fraud or mistake to state claims with particularity, or set forth “the ‘who, what, when, where, and how' of the events constituting fraud or mistake.” Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 339 (5th Cir. 2008) (quoting ABC Arbitrage Plaintiffs Grp. v. Tchuruk, 291 F.3d 336, 350 (5th Cir. 2002) (internal quotations omitted)). The PSLRA incorporates Rule 9(b)'s particularity requirement, and courts pay careful attention to allegations made on information and belief, as Plaintiffs have done here, to ensure that they have carried their burden to “state with particularity all facts on which that belief is formed.” ABC Arbitrage, 291 F.3d at 350 (quoting 15 U.S.C. § 78u-4(b)(1)) (emphasis in original).

The PSLRA further specifies that Plaintiffs must plead facts “giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78-u4(b)(2). The state of mind requirement is scienter: an “intent to deceive, manipulate, or defraud or severe recklessness.” Owens v. Jastrow, 789 F.3d 529, 535-36 (5th Cir. 2015) (quoting Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 251 (5th Cir. 2009) (internal quotation marks omitted)). Severe recklessness is a high bar, “limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standard of ordinary care.” Abrams v. Baker Hughes Inc., 292 F.3d 424, 430 (5th Cir. 2002). The “danger of misleading buyers or sellers” must be “either known . . . or . . . so obvious that the defendant must have been aware of it.” Id. A strong inference of scienter is one that is more than merely reasonable; it is “cogent” and “at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007).

A. Plaintiffs Improperly Rely on Group Pleading

Plaintiffs must “distinguish among those they sue and enlighten each defendant as to his or her particular part in the alleged fraud.” Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 365 (5th Cir. 2004) (emphasis in original). Allegations against the Defendants as a group, without more specific connections between an individual Defendant and an allegedly fraudulent statement, should be disregarded. Owens, 789 F.3d at 537-38. Scienter must be shown as to each Defendant, and group allegations “are not properly imputable as to any particular defendant.” Id. at 537. Plaintiffs' allegations, while detailed, are largely impermissible group pleading.

1. Employee Groups.

The Complaint frequently refers to “senior ExxonMobil management,” “corporate officials,” “executives,” or similar terms when describing who had access to certain records or performed certain review functions. See, e.g., Compl. ¶¶ 253, 256, 261, 263, 267. In doing so, Plaintiffs contend that because Defendants belonged to those categories of personnel who had record access or review responsibilities, it is proper to infer that Defendants in fact accessed records or signed off on documents containing information that rendered the disputed statements false and misleading. Plaintiffs argue that, at the very least, the Defendants were severely reckless in not noticing. Id. at ¶ 269. But it is well established that an officer's position on its own is insufficient to support an inference of scienter, Abrams, 292 F.3d at 433, barring special circumstances which are inapplicable here.^[2] Plaintiffs must go further to explain which specific individuals personally knew or failed to apprehend what information and when in order to allege the necessary state of mind with particularity.

2. Common Knowledge.

Plaintiffs contend that the Defendants spoke with intent or severe recklessness when they used the “green blob” slide^[3] demonstrating the 2024 1-million-barrel goal because it was “common knowledge throughout the company” that the goal was not achievable. Compl. ¶ 278. But allegations that certain practices or information are common knowledge are “too vague and conclusory to support a finding that defendants knew they were making false...