DENVER (CN) - Chesapeake Energy cannot be sued for securities fraud because its failed disclosure of hedging strategies to shareholders was not material or misleading, the 10th Circuit ruled.
A United Food and Commercial Workers Union pension fund filed a proposed class action against the Oklahoma City-based company, its officers board of directors in federal court in 2009 for securities fraud. The fund claimed the company's stock plummeted after its initial public offering in July 2008 when natural gas prices tanked and the financial crisis rocked the economy.
The fund argued the company should have disclosed that it had expanded a "risky gas-price hedging strategy" that put it in danger if natural gas prices fell. It also argued that former CEO Aubrey McClendon had pledge all of his stock as security for margin loans and lacked the money to meet margin calls. The trial court later granted Chesapeake summary judgment and entered judgment for the company in June 2013.
On Friday, a three-judge panel with the Denver-based 10th Circuit affirmed the ruling.
Writing for the court, Judge Harris L. Hartz agreed that there was no violation of disclosure duties.
"We doubt that the registration statement was misleading," the 27-page opinion stated. "Certainly, plaintiff has failed to support its claim that Chesapeake changed its knockout hedging strategy in the second quarter of 2008."
Hartz said that although the information on the complex knockout swaps are absent from the registration statement, they are found in the company's SEC filings within the registration statement.
"Of those filings, the May 10-Q -- a quarterly report with data through March
2008 -- provided the most recent disclosures about Chesapeake's knockout swaps," he wrote. "It listed the volume of knockout swaps Chesapeake had entered into that would mature in 2008, 2009, and 2010, and stated the average fixed price and the average knockout price for the contracts."
Hartz disagreed with the fund's argument that disclosures in a follow-up 8-K filing should not be considered because it was not part of the offering materials.
"But the report is still relevant," he wrote. "The claim here is that Chesapeake failed to disclose material information, and '[m]ateriality ... depends on the information that already exists in the market,'" the opinion stated. "Undisclosed information is material only if its disclosure would have 'significantly altered the total mix of information available' to a reasonable investor. Public documents are part of that total mix if an investor interested in a particular type of information about a company would know of the existence of the record and could readily access it."
The appeals court also concluded the registration statement adequately disclosed McClendon's stock, rejecting arguments that it should have been more specific.
"All shares held in margin accounts are vulnerable to margin calls, depending on movements in the market," the opinion stated. "The disclosure that plaintiff insists on -listing exactly the number of shares serving as collateral at the moment of reporting - can understate risk by obscuring the fact that other shares held in margin accounts might be needed as collateral in the future. Chesapeake's failure to specify how many of McClendon's shares actively served as collateral was not a material omission because, if anything, it provided an excessive warning of risk by overstating the number of collateralized shares."
The union did not respond to a request for comment Monday. Gordon Pennoyer, Chesapeake's strategic communications director, declined to comment on the ruling Tuesday morning.