Column: Conservative appeals court will probe certification of Anadarko investors’ class action

It’s never a happy development for plaintiffs when a federal appeals court agrees to review a trial judge’s decision to certify an investor class to pursue securities fraud claims.

I’d argue that these mid-case, or interlocutory appeals, are even more perilous for shareholders since the U.S. Supreme Court held in 2021's Goldman Sachs v. Arkansas Teachers Retirement System that trial judges should consider “all probative evidence” in weighing whether defendants have managed to rebut the presumption that their alleged fraud impacted the company’s share price.

Look, for instance, at what happened when the Goldman Sachs case returned to lower courts after the Supreme Court issued its decision. The trial judge recertified the class for a third time, but Goldman persuaded the 2nd U.S. Circuit Court of Appeals to grant its third interlocutory appeal to review the decision. The third time proved the charm for the bank: The appeals court decertified the class, holding, as I’ve reported, that there was too wide a gap between Goldman’s general statements about conflict management and subsequent revelations about conflicts in specific collateralized debt deals to support shareholders’ theory that the bank’s alleged misrepresentations propped up its share price.

Now defense lawyers for Anadarko Petroleum are hoping that the Supreme Court’s Goldman ruling prompts the 5th Circuit to undo the certification of a class of shareholders alleging that the company covered up disappointing drilling results in a much-ballyhooed oilfield in the Gulf of Mexico.

The 5th Circuit will hear oral argument next week on Anadarko’s contention that U.S. District Judge Charles Eskridge of Houston improperly certified the class based on expert evidence first introduced in shareholders’ reply brief in support of class certification.

Cravath, Swaine & Moore, which represents Anadarko (now part of Occidental Petroleum OXY) argued in its brief to the right-leaning appellate court that under the Goldman Sachs standard, Eskridge should have allowed the company to submit a sur-reply brief after shareholders disclosed an expert report on the price impact of Anadarko’s alleged misrepresentation in their brief responding the company’s opposition to class certification.

As is usual in securities fraud class actions, the details of the case are unique and complex. Shareholder lawyers from Robbins, Geller, Rudman & Dowd told the 5th Circuit in their brief that the full trial court record proves that Erskine properly denied Anadarko’s motion to submit a sur-reply brief, as well as its motions to exclude the expert report on price impact and to reconsider class certification.

The judge, according to Robbins Geller, gave Anadarko all of the leeway it was entitled to, so the appeals court cannot conclude that he abused his discretion.

But because Anadarko and Cravath pitched the interlocutory appeal as a chance for the 5th Circuit to solve a recurring problem in shareholder fraud class actions — arguing that, in the wake of the Supreme Court’s Goldman Sachs decision, the court should use this case to confirm defendants’ right to respond to new shareholders’ evidence — the securities bar should be paying attention.

Anadarko counsel Kevin Orsini of Cravath did not respond to my query. Shareholder lawyer Joe Daley of Robbins Geller declined to comment.

Shareholders allege that Anadarko’s share price fell by about 8% in May 2017 after the company disclosed a $902 million write-down on its investment in the Shenandoah oilfield in the Gulf of Mexico after a so-called appraisal well came up dry. Plaintiffs' lawyers contend that Anadarko hid warnings from its own engineers and geoscientists, who had been predicting for years that the field would not measure up to Anadarko’s hype.

Anadarko, meanwhile, maintains that its share price fell on that day for a reason wholly unrelated to the Shenandoah field.

At around the same time that the company disclosed the $902 million write-down, Colorado officials announced that Anadarko’s gas operations were responsible for the deadly explosion of a home in Firestone, Colorado — and that all oil and gas companies in the state would be required to conduct additional safety checks. The Colorado announcement, according to Anadarko, “led to significant regulatory uncertainty,” which, in turn, pushed its share price lower.

Anadarko did not submit an expert event study of its share price to refute shareholders’ claims in its brief opposing class certification. It instead cited its expert’s analysis of the share prices of its partners in the Shenandoah project and its Colorado oil and gas competitors to argue that the Colorado news, not the Shenandoah write-down, impacted the market for its shares.

In response, Robbins Geller cited an Anadarko-specific event study by its expert, who refuted the conclusions of the company's expert.

Anadarko contested the shareholders' event study in a Daubert motion and also asked for a chance to counter its findings in a sur-reply brief. Erskine denied both requests, concluding that the shareholder study was a legitimate rebuttal to Anadarko’s arguments.

Robbins Geller told the 5th Circuit that Anadarko should not get a second chance based on its unsuccessful strategy of submitting event studies of the company’s partners and competitors instead of the company itself.

Anadarko said Erskine erred grievously in basing his class certification decision on evidence introduced in a reply brief without giving the company a fair shot to refute it.

The company is asking the appeals court not only to remand the case to the trial court with instructions to reconsider class certification in light of Anadarko’s price impact evidence but to go even farther and hold that the class cannot be certified.

The case will be heard next Thursday by Judges Carolyn King, James Ho and Kurt Engelhardt.

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