Duane and Virginia Lanier Trust v. Sandridge Energy Inc, 5:15-cv-00634

Background

SandRidge created two royalty trusts (Mississippian Trust I and II) to monetize royalty interests in sets of wells and conducted IPOs in April 2011 (Trust I) and April 2012 (Trust II).
Trust I conveyed interests in 160 wells (37 producing, 123 to be developed); projections estimated roughly 48.4% oil / 51.6% gas production over 20 years and significant oil-driven distributions.
Plaintiffs allege Trust I development wells produced materially less oil (and more gas) than projected, and that SandRidge accelerated drilling to boost aggregate oil output and meet distribution estimates, thereby masking poor individual-well performance.
After disclosures in November 2012 and January 2013 about steeper-than-expected regional oil declines, Trust I and II unit prices fell; plaintiffs and unitholders previously pursued related securities suits; Securities Act claims were dismissed; only Exchange Act Sections 10(b) and 20(a) claims remained.
The consolidated amended complaint alleges false/misleading statements (e.g., that oil production was "on trend/on target") and claims scienter based on officers’ access to production reports and motive tied to completing Trust II and SandRidge unit sales.
The court evaluated Rule 12(b)(6) arguments and PSLRA pleading standards and denied most motions to dismiss, but dismissed the Section 10(b) claim against defendant James D. Bennett for insufficient scienter allegations.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether plaintiffs pleaded scienter for officer-defendants	Ward and Grubb knew declining oil trends from meetings/reports and had motive to conceal poor performance	Allegations are generalized access-to-data claims; plaintiffs fail to identify specific reports/witnesses; motive alone insufficient	Court finds strong inference of scienter for Ward and Grubb; scienter not pleaded for Bennett (dismissed as to him)
Whether specific statements/omissions were pleaded as false or misleading	Registration statements and conference-call statements (e.g., "on trend/on target") were misleading because development wells underperformed and disclosures were concealed	Statements were forward-looking or accurately reported aggregate results; plaintiffs rely on hindsight	Court finds plaintiffs sufficiently specified false/misleading statements and why they were false when made; claim survives
Whether plaintiffs met PSLRA particularity for falsity and scienter	Complaint alleges particular statements, reasons they were misleading, meeting attendance, reports, and motive	Defendants argue lack of particularized facts tying statements to defendants’ knowledge; plausible nonculpable inferences exist	Court holds PSLRA pleading satisfied for falsity and scienter (for Ward and Grubb) but not for Bennett
Whether Section 20(a) control-person liability is adequately pleaded	Officer-defendants had authority over SandRidge and Trust I operations and reporting (participation in calls, operations, administrative services)	Defendants argue control not adequately alleged	Court finds plaintiffs pleaded control sufficiently; Section 20(a) claim survives against Ward, Grubb, and Bennett (note: Bennett retained on 20(a) though 10(b) dismissed)

Key Cases Cited

City of Philadelphia v. Fleming Cos., Inc., 264 F.3d 1245 (10th Cir. 2001) (elements of a Section 10(b) claim)
Anixter v. Home-Stake Prod. Co., 77 F.3d 1215 (10th Cir. 1996) (definition of recklessness for scienter)
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (PSLRA scienter standard; compare competing inferences)
Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) (scienter defined for securities fraud)
Nakkhumpun v. Taylor, 782 F.3d 1142 (10th Cir. 2015) (PSLRA falsity particularity requirement)
Grossman v. Novell, Inc., 120 F.3d 1112 (10th Cir. 1997) (fraud-by-hindsight and particularity requirements)
Maher v. Durango Metals, Inc., 144 F.3d 1302 (10th Cir. 1998) (requirements for Section 20(a) control-person liability)
Adams v. Kinder-Morgan, Inc., 340 F.3d 1083 (10th Cir. 2003) (definition of control for Section 20(a))