In recent months, there have been a number of securities class action lawsuits filed based on alleged misrepresentations of the defendant company’s environmental compliance. On August 7, 2014, the securities suit filed against Exide Technologies and certain of its directors and officers based on the defendants’ allegedly misleading statements about the company’s compliance with environmental regulations became the latest environmental disclosure securities suits to overcome the initial pleading hurdles. These cases underscore the fact that reporting companies’ environmental compliance disclosures are facing increasing scrutiny, making the quality of the environmental disclosures increasingly important.
A copy of Central District of California Judge Stephen V. Wilson’s August 7, 2014 order denying the defendants’ motion to dismiss can be found here.
Exide is in the business of producing, recycling and distributing lead-acid batteries. The company maintains a large recycling plant in Vernon, California. The plaintiffs in the securities suit allege that the company experienced a series of problems and related regulatory compliance issues regarding the Vernon plant’s alleged emissions of arsenic into the air and regarding an allegedly non-compliant piping system that allegedly was leading hazardous materials into the groundwater. These problems allegedly were not publicly disclosed until the period March through May of 2013, while during the preceding months the defendants allegedly made a number of reassuring statements about the company’s environmental compliance.
Judge Wilson granted the defendants’ motion to dismiss the plaintiffs’ initial complaint without prejudice. In February 2013, the plaintiffs filed an amended complaint, and the defendants renewed their motion to dismiss.
In his August 7 Order, Judge Wilson denied the defendants’ renewed motion to dismiss. He found that amended complaint pled “allegations sufficient to present a question of fact as to whether Defendants omissions and misrepresentations regarding the Vernon plant’s environmental contamination issues made Defendants’ communications with investors misleading.”
In support of their motion to dismiss, the defendants had tried to argue that the company’s SEC filings were sufficient to disclose the company’s environmental risks. As quoted by Judge Wilson in his order, the company’s SEC filings stated that the company could not “be certain that it has been, or will at all time be, in complete compliance with all environmental requirements, or that the Company will not incur additional material costs or liabilities in connection with those requirements in exces of amounts it has reserved.”
Judge Wilson said that it is “an issue of fact whether a reasonable investor would consider this boilerplate disclosure sufficient enough that the disclosure of the actual environmental issues at Vernon during the class period would not have significantly altered the total mix of information made available about the company.” Judge Wilson went on to note that “if Defendants general environmental disclosures were sufficient to cover the existing environmental problems at Vernon as a matter of law at the pleading stage, it is difficult to see a logical stopping point to the ability of a company to ‘disclose’ serious environmental or other problems to investors through vague, general or boilerplate statements.”
In order to try to satisfy the requirements for pleading scienter, the plaintiffs relied on the allegations based on statements that confidential witnesses who alleged that Exide has a system in place for reporting environmental compliance issues, which the plaintiffs alleged were sufficient to show that individual defendants should have been aware of the Vernon plant’s issues. Taking a “holistic approach” to the scienter issue, including taking consideration of the seriousness of the problems at the Vernon plant and the importance of the Vernon plant to Exide’s operations, Judge Wilson found that the plaintiffs’ scienter allegations, taken in conjunction with the company’s environmental reporting system, “support a cogent inference that Defendants were aware of Vernon’s environmental issues.”
The survival of the environmental disclosure securities suit against Exide comes closely after the Secnd Circuit’s recent ruling in the JinkoSolar securities suit, discussed here, in which the appellate court reversed the lower court dismissal of the suit and concluded that the plaintiffs’ allegations concerning the alleged deficiencies of the defendant company’s environmental compliance disclosures were sufficient. While these are just two cases, it does seem as if the plaintiffs are getting some traction in securities suits based on environmental compliance disclosures.
As the derivative lawsuit filled earlier this year against the board of Duke Energy highlights, environmental issues apparently are becoming an area of increasing focus for plaintiffs’ lawyers. As cases like those filed against Exide and JinkoSolar prove to be viable, further cases based on environmental compliance and environmental disclosures may follow.
At a minimum, it is clear that companies’ environmental disclosures will face increased scrutiny. In that respect, Judge Wilson’s comments about Exide’s environmental disclosures are interesting. From Judge Wilson’s perspective at least, mere “boilerplate” disclosures or “vague” or “general” statements will not be sufficient to protect companies from allegations that their environmental compliance disclosures were inadequate. The lesson is that it will be increasingly important for companies to ensure that their environmental disclosures avoid use of mere boilerplate and instead incorporate specific and detailed discussion of the circumstances surrounding their environmental compliance.
By the same token, D&O insurance underwriters considering companies whose operations may present environmental concerns will want to review the environmental disclosures in the companies’ periodic reports in order to assess the extent to which the disclosures provide a specific and detailed picture of the company’s environmental compliance circumstances.
Finally, and as a I noted in my recent post about the Second Circuit’s decision in the JinkoSolar case, it clearly is going to be important for policyholders to ensure that their D&O policy contains no pollution exclusion (as is the case in many current policies, which, rather than including a pollution exclusion simply carve out environmental remediation costs from the definition of covered loss), or, they have a pollution exclusion, that the exclusion contains a provision carving back coverage for derivative claims and securities suits.