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Reese v. Malone

ELR Citation: 44 ELR 20028
Nos. 12-35260, (9th Cir., 02/13/2014)

The Ninth Circuit held that shareholders may go forward with their lawsuit against an oil company for allegedly making false and misleading statements about the condition of Alaskan pipelines and the company's pipeline maintenance and leak detection practices prior to and in the wake of an oil spill. In March 2006, an oil leak in one of the company's pipelines spilled approximately 200,000 gallons of oil onto the Alaskan tundra. The company stated the spill was an anomaly, but a second leak from a different line was discovered five months later. The company then temporarily shut down regional operations. The shareholders sought relief under §§10(b), 18(a) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, for investment losses stemming from the second spill and shutdown. The lower court, however, dismissed the claims because it concluded that the shareholders did not plead facts sufficient to show that the challenged statements gave rise to a strong inference of scienter. But the appellate court disagreed. Facts alleged in the complaint support the conclusion that the company had been aware of corrosive conditions for over a decade, and yet chose not to address them. The complaint also alleges that the company intentionally adopted corrosion monitoring practices that deviated from industry standards in an effort to cut costs. And the complaint also suggests that the company had every reason to know, at the very least, that they did not have accurate information regarding the condition of the Prudhoe Bay pipelines. The court therefore concluded that under a holistic analysis, the shareholders' allegations of scienter combined to create a strong inference of the oil company's deliberate recklessness as to the false or misleading nature of its public statements.