¶33
Jagged first argues that the division adopted a theory of
"couching" generally rejected by federal courts
when the division concluded that the allegedly immaterial
puffery statements that Oklahoma had identified as misleading
were "transformed into material and therefore actionable
statements simply by the presence in the offering materials
of other, nearby, truthful, historical information."
Jagged asserts that the division got it doubly wrong because,
in Jagged's view, Oklahoma had not raised the argument on
which the division relied, nor did Oklahoma identify the
contextual statements on which the division ultimately rested
its conclusion (this is the second issue on which we granted
certiorari). We are unpersuaded.
¶34
As an initial matter, Jagged misapprehends the division's
analysis. The division did not rely on a theory of couching,
nor did it rule on a basis not properly before it. Jagged
principally argued that Oklahoma's assertions constituted
immaterial puffery as a matter of law. Responding directly to
this argument, the division concluded that Statements 4 and 2
were not overly vague statements of corporate optimism that
were incapable of objective verification. To the contrary,
the division concluded that when read in context, the
statements had "specific meaning," and Oklahoma had
alleged that such statements were misleading when they were
made. Okla. Police Pension, ¶¶ 75, 78.
Thus, the division observed that Oklahoma had alleged that
Jagged's "historical claims were partially
inaccurate, making the predictive claims that they support
misleading by omission." Id. at ¶ 75.
¶35
Accordingly, rather than looking to accurate historical
statements "couched" around allegedly misleading
(and therefore non-actionable) puffing statements, the
division simply considered the allegedly misleading
statements in context, which, under established precedent, it
could properly do.
¶36
Specifically, in reviewing a district court's dismissal
of a complaint for failure to state a claim, appellate courts
must examine the complaint to determine its facial
plausibility, and in doing so, the courts may "consider
any written instrument attached to the complaint, statements
or documents incorporated into the complaint by reference,
legally required public disclosure documents filed with
the SEC, and documents possessed by or known to the
plaintiff and upon which it relied in bringing the
suit." ATSI Commc'ns, Inc. v. Shaar Fund,
Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (emphasis added).
¶37
Accordingly, in determining whether Oklahoma plausibly
pleaded the element of materiality, the division did not err
in considering all of the allegations
in Oklahoma's amended complaint, which
identified the "partially misleading" historical
statements on which the division relied, documents
incorporated by reference in the amended complaint, and
representations made in the offering documents filed with the
SEC (including any tables, graphs, and statements set forth
therein).
¶38
We thus turn to the merits of Jagged's contention that,
as a matter of law, Statements 4 and 2 comprised immaterial,
non-actionable puffery.
¶39
In cases like the one before us, "two issues are central
to claims under sections 11 and 12(a)(2): (1) the existence
of either a misstatement or an unlawful omission; and (2)
materiality." Morgan Stanley, 592 F.3d at 360.
Materiality for purposes of sections 11 and 12(a)(2), in
turn, is defined as follows: "[W]hether the
defendants' representations, taken together and in
context, would have misled a reasonable investor."
Id. (alteration in original) (quoting Rombach v.
Chang, 355 F.3d 164, 172 n.7 (2d Cir. 2004)).
¶40
Materiality is an inherently fact-specific inquiry.
Facebook, 986 F.Supp.2d at 508. Thus, a complaint
may not properly be dismissed on materiality grounds unless
the alleged misstatements or omissions "are so obviously
unimportant to a reasonable investor that reasonable minds
could not differ on the question of their importance."
ECA, Loc. 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan
Chase Co., 553 F.3d 187, 197 (2d Cir. 2009) (quoting
Ganino v. Citizens Utils. Co., 228 F.3d 154, 162 (2d
Cir. 2000)).
As a result, the materiality element "will rarely be
dispositive in a motion to dismiss." Morgan
Stanley, 592 F.3d at 360.
¶41
Statements that are classified as "puffery" are
"generalized statements of optimism that are not capable
of objective verification." Grossman v. Novell,
Inc., 120 F.3d 1112, 1119 (10th Cir. 1997). Such
"[v]ague, optimistic statements are not actionable
because reasonable investors do not rely on them in making
investment decisions." Id. And because
reasonable investors would not rely on such vague, broad, and
non-specific statements, those statements are immaterial as a
matter of law. See Barilli v. Sky Solar Holdings,
Ltd., 389 F.Supp.3d 232, 250 (S.D.N.Y. 2019).
¶42
Like all statements in the materiality analysis, puffery must
be considered in context. See Casella v. Webb, 883
F.2d 805, 808 (9th Cir. 1989). Context, however, can take
many forms and, depending on the facts, may well impact the
significance, if any, that a reasonable investor would place
on the withheld or misrepresented information.
¶43
For example, in City of Monroe Employees Retirement
System v. Bridgestone Corp., 399 F.3d 651, 669-71 (6th
Cir. 2005), the Sixth Circuit considered a tire
manufacturer's and its subsidiary's public statements
affirming the safety and quality of its tires, as well as
allegedly false representations in the manufacturer's
financial statements accompanying its annual reports. The
court concluded that all but one of eight specifically
challenged representations were "best
characterized as loosely optimistic statements insufficiently
specific for a reasonable investor to 'find them
important to the total mix of information
available.'" Id. at 671 (quoting In re
Ford Motor Co. Sec. Litig., 381 F.3d 563, 571 (6th Cir.
2004)). As to the one statement that the court viewed
differently (the subsidiary's statement that "the
objective data" reinforced its belief that its tires
were "high-quality, safe tires"), the court found
this statement to be actionable, given the context in which
it was made. Id. at 674. Specifically, the court
observed that because consumers had filed multiple lawsuits
against the subsidiary prior to the time that the subsidiary
made the statement regarding the tires' safety, "[a]
reasonable juror could infer that the 'objective
data' representation was a direct response to the
lawsuits, or to the public challenges to the safety of [the
subsidiary's] tires, or to both." Id. at
672. The court further disagreed that the representation at
issue was merely a statement of general optimism or pure
opinion because, in the court's view, "the statement
was an assertion of a relationship between data and a
conclusion," which a fact-finder "could test
against record evidence." Id. at 674. And even
if the statement could be classified as opinion, the court
deemed it "specific enough to form the basis of an
actionable securities fraud claim." Id.
¶44
Industry-specific context may likewise impact the materiality
of a given statement. For example, in
Bricklayers & Masons Local Union No. 5 Ohio Pension
Fund v. Transocean Ltd., 866 F.Supp.2d 223, 243
(S.D.N.Y. 2012), the court considered whether an offshore oil
contractor's representation that it had "conducted
'extensive' training and safety programs" was,
among other things, non-actionable puffery. The court
concluded that the representation was actionable because the
court could not say, as a matter of law, that the
representation regarding the contractor's training
efforts was so obviously unimportant to a reasonable investor
that reasonable minds could not differ as to the importance
of the representation. Id. at 244. In support of
this conclusion, the court looked to the industry-specific
context, stating, "In an industry as dangerous as
deepwater drilling, it is to be expected that investors will
be greatly concerned about an operator's safety and
training efforts." Id.
¶45
Lastly, a defendant's own, separate representations may
be telling. See Casella, 883 F.2d at 808. Thus, a
defendant's statements "'cannot be considered in
isolation,' but must be viewed 'in the context of the
total presentation.'" Id. (quoting
Hughes v. Dempsey-Tegeler & Co., 534 F.2d 156,
176 (9th Cir. 1976)). "What might be innocuous
'puffery' or mere statement of opinion standing alone
may be actionable as an integral part of a representation of
material fact when used to emphasize and induce reliance upon
such a representation." Id.
¶46
Even when considering the pertinent context in which
statements were made, however, federal courts have concluded
that "general positive statements"
about, for example, a chief executive officer's
"professional history and management abilities" and
about a company's "proven track record" can
still, in appropriate circumstances, amount to non-actionable
puffery. Barilli, 389 F.Supp.3d at 252-53; see
also In re Level 3 Commc'ns, Inc. Sec. Litig., 667
F.3d 1331, 1340 (10th Cir. 2012) (concluding that a
defendant's representations as to its "proven
integration experience" and its intended
"focus" in the upcoming year on integration were
"vague (if not meaningless) management-speak upon which
no reasonable investor would base a trading decision").
¶47
In light of the foregoing precedent, Jagged argues that
Statements 4 and 2 constituted immaterial puffery because
Statement 4 "was a vague opinion about the company's
perceived strengths" and Statement 2 was a "generic
statement[] of corporate objectives." For several
reasons, we disagree.
¶48
First, regarding Statement 4, as the division below
suggested, touting a strategy of maximizing returns "by
optimizing drilling and completion techniques through the
experience and expertise of [Jagged's] management and
technical teams" and lauding a company's
"proven track record" may, standing alone, be too
general to support a viable claim. But that is not all that
Oklahoma alleged. As noted above, Oklahoma also alleged that
known historical and objectively verifiable facts and data
could plausibly show that these general allegations were
misleading at the time of the IPO and that defendants knew
that they were,
thereby undermining any claim of mere puffery. For example,
Oklahoma alleged that contrary to Jagged's
representations, former Jagged and contractor employees
"during the relevant period" observed that (1)
Jagged's in-house geologists were, in fact,
inexperienced and incompetent, with one
being deemed "not qualified" by a Jagged executive
due to his lack of relevant experience; (2) incompetence at
Jagged's drilling sites resulted in myriad problems and
mistakes of which Jagged's CEO was himself aware; and (3)
Jagged's "chief drilling contractor" and a
Jagged executive steered contracts to companies that they
controlled or that were controlled by business associates
(sometimes based on bids that were lower than other bids that
Jagged had received), and these companies then signed
favorable contracts and proceeded to overbill Jagged,
rendering the representations regarding Jagged's history
of decreasing costs at best misleading (and verifiably so).
This is particularly true given Item 303's requirement
that an SEC registrant disclose trends, demands, events, or
uncertainties that are known to management and reasonably
likely to have material effects on the registrant's
financial condition or results of operation.
Facebook, 986 F.Supp.2d at 506. Thus, even if the
historical information regarding Jagged's declining costs
in the stated time period was accurate, the trend was
allegedly in the opposite direction, and, if true, defendants
had a duty to disclose that trend and its resulting
uncertainty.
¶49
Second, regarding Statement 2, in which Jagged represented
that its development plan was "comprised exclusively of
horizontal drilling with an ongoing focus on reducing
drilling times, optimizing completions, and reducing
costs," we again acknowledge that, standing alone, this
statement might not be actionable. But when viewed in the
context of the historical and objectively verifiable facts
set forth above, we conclude that Oklahoma has pleaded
sufficient facts to support plausible claims for relief.
Specifically, the facts set forth above in connection with
our analysis of Statement 4, if true, can plausibly establish
that Jagged, in fact, was not focused on optimizing
completions and reducing costs. Indeed, the alleged facts,
which are verifiable (and thus, by definition, not mere
puffery), suggest the opposite.
¶50
Third, as noted above, industry-specific context may likewise
impact the materiality of a given statement. See
Bricklayers & Masons Local Union No. 5, 866
F.Supp.2d at 243-44. Here, accepting the allegations in
Oklahoma's amended complaint as true, in the oil and gas
industry, a horizontal well can cost up to 300% more to drill
and complete for production than a vertical well directed to
the same target horizon, but the extra costs associated with
this process are expected to be recovered through increased
production from the well. Thus, just as an investor in an
industry as dangerous as deepwater drilling would be expected
to be concerned about an operator's safety and training
efforts, id. at 244, an investor in
a company like Jagged, which exclusively engaged in
horizontal drilling and relied heavily on contract drilling
services companies, would be expected to be concerned with
the company's experience with horizontal drilling, its
relationships with its contractors, and its ability to
control costs.
¶51
Fourth, were we to adopt Jagged's rigid position
regarding the representations that it alleges to be puffery
here, we fear that we would effectively create a form of
"magic words" exception to the materiality element
that is inconsistent with what, as noted above, is an
inherently fact-specific analysis. See Facebook, 986
F.Supp.2d at 508. Under Jagged's apparent interpretation,
virtually any statement containing the words
"experience," "expertise," "track
record," or "focus" would be immaterial as a
matter of law, regardless of anything else alleged in a
complaint. Were we to embrace such a position, however,
securities registrants could use words like these to hide
behind, or between, their own misrepresentations. Thus, we
agree with the observation of one federal district court that
"a company's statements that it is
'premier,' 'dominant,' or 'leading'
must not be assessed in a vacuum (i.e., by plucking
the statements out of their context to determine whether the
words, taken per se, are sufficiently
'vague' so as to constitute puffery)."
Scritchfield v. Paolo, 274 F.Supp.2d 163, 175-76
(D.R.I. 2003). Rather, such statements "are properly
interpreted only by reference to the relevant circumstances
that underlie their meaning." Id. at 176.
¶52
For these reasons, on the specific facts presented here, we
cannot say that the statements at issue were nothing more
than generalized statements of corporate optimism that cannot
be objectively verified. Nor, when we consider the context in
which the statements were made, can we conclude that they
would have been so obviously unimportant to a reasonable
investor that reasonable minds could not differ on the
question of their importance, thereby rendering them
immaterial as a matter of law. See ECA, 553 F.3d at
197; Grossman, 120 F.3d at 1119. Accordingly, we
conclude that the division below properly rejected
Jagged's contentions that Statements 4 and 2 were, as a
matter of law, mere puffery.
¶53
In so concluding, we are not persuaded by Jagged's
assertion that the representations at issue were not capable
of objective verification. During oral argument, Jagged
contended that because no standard exists for determining
when an unspecified amount of experience can constitute
"having experience" or when a company's
business activities become a "focus," its
representations that it had (1) management and technical
teams experienced in "optimizing drilling and completion
techniques" and (2) "an ongoing focus on reducing
drilling times, optimizing completions and reducing
costs" are inherently unverifiable. In our view,
however, "verifiable" is not necessarily synonymous
with "quantifiable" or "measurable."
Thus, rather than examining just how much experience
Jagged's
management and technical teams had and how much of
Jagged's business activity centered around reducing
drilling times, we believe that the relevant question is
whether a fact-finder could test Jagged's statements
against the record evidence. See City of Monroe, 399
F.3d at 674. Here, evidence that one of Jagged's two
in-house geologists was right out of college (coupled with a
Jagged executive's statement that this lack of experience
rendered the geologist "not qualified") is one form
of record evidence on which a fact-finder could reasonably
rely to test Jagged's assertions regarding its experience
and expertise. Incompetence on the job leading to
inappropriate drilling site selection, collapsed wells, and
dramatically increased costs, if proven, would likewise
constitute objective evidence on which a fact-finder could
rely to test Jagged's representations.
¶54
We likewise are unpersuaded by the case law on which Jagged
relies because we view the statements at issue here as
distinguishable from the kinds of statements that other
courts have found to be too vague to be actionable. To be
sure, courts have deemed to be non-actionable puffery bald
representations touting a company's "[e]xperienced
management team" with a "track record of executing
effective strategies and achieving profitable growth,"
City of Omaha Police & Fire Ret. Sys. v. Evoqua Water
Techs. Corp., 450 F.Supp.3d 379, 400 (S.D.N.Y. 2020),
and statements extolling a company's "successful
businessman" chief executive officer and the
company's "proven track record . . . operating
under local conditions," Barilli, 389 F.Supp.3d
at 252. For the reasons set forth above, however, in this
case, Oklahoma did not rely solely on bald statements of
corporate optimism. Rather, it alleged sufficient objectively
verifiable facts to allow a fact-finder to test Jagged's
more general representations.
¶55
Accordingly, we conclude that Oklahoma's allegations
regarding Statements 4 and 2 were sufficient to survive
Jagged's motion to dismiss on puffery grounds.
¶56
Jagged next argues that the division committed reversible
error when it allowed Oklahoma to base its claims on
"hindsight pleading." Specifically, in Jagged's
view, the division improperly relied on Oklahoma's
allegations regarding post-IPO well collapses, cost
increases, disadvantageous contracts, and employee departures
to infer that Jagged had misrepresented or omitted
information regarding its team's experience or its
finances at the time of the IPO. Jagged asserts that the
division was required to assess any alleged
misrepresentations or omissions at the time the disclosures
were made or should have been made. Although we view this
issue as somewhat close, we ultimately are unpersuaded.
¶57
As noted above, to plead a claim under sections 11, 12(a)(2),
or 15 of the Securities Act, a plaintiff must allege that the
purported misrepresentations or
omissions were made at the time of the IPO. See 15
U.S.C. § 77k(a) (providing for liability when "any
part of the registration statement, when such part became
effective, contained an untrue statement of a material
fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein
not misleading") (emphasis added); 15 U.S.C. §
77l(a)(2) (providing for liability when a person
offers or sells a security by means of a prospectus or oral
communication that includes an untrue statement of material
fact or omits a material fact); 15 U.S.C. §
77o(a) (providing for derivative liability of
"controlling persons"). At a minimum then, a
plaintiff must plead facts to demonstrate that the allegedly
misrepresented or omitted facts existed and were either known
or knowable at the time of the offering. See In re HEXO
Corp. Sec. Litig., 524 F.Supp.3d 283, 300 (S.D.N.Y.
2021).
¶58
We recognize that Oklahoma's amended complaint includes
many allegations recounting actions and events that occurred
after the IPO, and we agree that these events cannot
alone support an inference that trouble was brewing at Jagged
prior to the IPO.
¶59
But in addition to these claims, the amended complaint makes
the factual allegation that "during the relevant
period," former employees of Jagged and its contractors
observed that (1) Jagged's two in-house geologists were
inexperienced and incompetent; (2) one Jagged executive
regarded one of the two geologists as
"not qualified" as a result of "his lack of
relevant experience and this being his first job out of
college"; (3) the collapsing of many wellbores was
indicative of the geologists' incompetence in selecting
well sites; (4) the well collapses, as well as Jagged's
entering into disadvantageous contracts, led to
"dramatically increased costs"; and (5)
Jagged's CEO was aware of myriad problems and mistakes at
the drilling sites. Similarly, the amended complaint alleges
that "at the time of the Offering, [Jagged]
failed to disclose that it did not have qualified workers in
sufficient numbers to achieve its production and well
completion goals" and further failed to disclose the
various facts set forth above. (Emphasis added.)
¶60
Although the amended complaint could (and perhaps should)
have better clarified exactly when "the relevant
period" was, when we read "the relevant
period" together with "at the time of the
Offering," we are satisfied that Oklahoma sufficiently
alleged that Jagged's representations were misleading at
the time of the IPO and not solely in hindsight. This is
particularly true given that, at this stage of the
proceedings, we must accept the amended complaint's
well-pleaded allegations as true and view those allegations
in the light most favorable to Oklahoma. See N.M.,
¶ 18, 397 P.3d at 373.
¶61
Accordingly, we conclude that Oklahoma plausibly alleged
facts indicating that Jagged's statements about its
workforce experience and focus on decreasing
costs, and its decision to omit information about
disadvantageous contracts, were misleading at the time of the
IPO.
¶62
Finally, we note Jagged's contention that even if some of
Oklahoma's allegations are not based on hindsight
pleading, those that remain are still insufficient to state a
claim under the standard for opinion statements established
in Omnicare, Inc. v. Laborers District Council
Construction Industry Pension Fund, 575 U.S. 175, 194
(2015) (concluding that an investor "must identify
particular (and material) facts going to the basis for the
issuer's opinion").
¶63
Although the division below indicated that its conclusion
"that Oklahoma has stated a plausible claim that Jagged
misled investors" was "[p]ursuant to
Omnicare," Okla. Police Pension,
¶ 77, Jagged did not cite to Omnicare in its
certiorari petition, nor did it request that this court grant
certiorari to consider the division's decision regarding
opinion statements. Accordingly, that question is not
properly before us, and we will not consider it. See
Colo. Permanente Med. Grp., P.C. v. Evans, 926 P.2d
1218, 1228-29 (Colo. 1996).
¶64
In concluding that Oklahoma has plausibly pleaded its claims
on the specific facts before us, we emphasize the limited
nature of our opinion today. This case comes before us in the
context of a motion to dismiss for failure to state a claim.
Accordingly, the only question before us is whether Oklahoma
plausibly alleged facts that, if proven, can support
liability. In this context, we have assumed the
truth of Oklahoma's well-pleaded factual allegations, and
we have afforded Oklahoma the reasonable inferences to be
drawn from those allegations, as we are required to do. We
conclude only that the division correctly determined that it
could not dismiss the claims at issue as a matter of law at
this early stage of the proceedings. We, of course, express
no opinion on the ultimate merits of the claims asserted in
this case.
