Court Upholds Securities Fraud Claims Against Energy Transfer LP in Pipeline Suit

4/6/2021 - After full briefing and oral argument, a Philadelphia federal court rejected Energy Transfer’s bid to escape a securities class action lawsuit based on its alleged false statements to investors concerning two major pipeline construction projects across the state of Pennsylvania. 

As previously reported, in June 2020 BR&B and its co-counsel filed the Operative Class Action Complaint against Energy Transfer and a number of its executives on behalf of the lead plaintiffs, a group of five pension fund investors in the company.  The 190-page complaint asserted securities fraud claims on behalf of all persons who purchased Energy Transfer common units from February 25, 2017 through December 2, 2019 (the “Class Period”), and were damaged thereby.  The allegations arose from an FBI investigation into corruption surrounding the pipeline approval process as well as repeated alleged misrepresentations made by the company and its executives concerning the projects’ prospects, safety and compliance with regulations.

In late February 2021, BR&B partner Jeff Golan appeared for plaintiffs before Eastern District of Pennsylvania Judge Gerald A. McHugh in a two-hour oral argument on the defendants’ motion to dismiss the complaint.  Just over one month later, Judge McHugh issued a detailed 73-page opinion, allowing the bulk of the lawsuit to proceed and retaining claims against Energy Transfer and four of its key executives (Energy Transfer’s Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, and Chief Commercial Officer). 

Significantly, Judge McHugh’s ruling upheld claims across every category of alleged misstatements, including:

  • The timing of the completion of the Mariner East 2 and Revolution pipelines: “Plaintiffs have effectively shown that serious problems beset construction of the pipelines almost immediately . . .  and that within a short period of time, it was apparent that the pipelines could not be constructed within the timeline provided.  After that point in time, Plaintiffs have shown a strong inference that timeline statements were knowingly false when made.” 
  • The anticipated capacity of the completed project:  Once massive sinkholes began appearing in residential areas where the Mariner East 2 pipeline was being constructed, Judge McHugh upheld plaintiffs’ claims that defendants “knew that they could not complete the pipeline with the capacity touted to investors.” 
  • Energy Transfer’s stated commitment to safety and compliance with legal requirements:  Plaintiffs plausibly alleged that certain statements touting Energy Transfer’s purported commitment to safety were false “based on the flouting of regulations and consequent environmental disasters.”  The court also found that plaintiffs plausibly alleged that defendants were not complying with orders issued by the Pennsylvania Department of Environmental Protection at the times they issued statements assuring the public of their compliance and that they were prioritizing safety over profits.

In upholding plaintiffs’ claims against Energy Transfer and its executives, Judge McHugh held that plaintiffs alleged a strong inference that the company and these individuals made false or misleading statements either knowingly or with reckless disregard of the truth (i.e., with scienter).  Among other rulings, the Judge held that the statements involved “core matters of central importance” to the company and its high-level executives.  Summing up the evidence plaintiffs cited in the complaint, Judge McHugh found:

Collectively, Plaintiffs have painted a picture in which Defendants are alleged to have made statements directly contradicted by facts on the ground; these facts led to unprecedented fines from the Pennsylvania government and criminal investigations from multiple sources.  Holistically, the content of the alleged misstatements and omissions, taken together with the context in which they were issued, supports a strong inference of scienter.

In addition to constituting an important preliminary win for Energy Transfer investors, Judge McHugh’s ruling also provides persuasive authority that will be beneficial in future securities actions.  The opinion is available at Allegheny Cty. Employees’ Ret. Sys. v. Energy Transfer LP, No. CV 20-200, 2021 WL 1264027 (E.D. Pa. Apr. 6, 2021). 

BR&B looks forward to continuing the prosecution of this litigation on behalf of the Lead Plaintiffs and the putative class of investors who purchased Energy Transfer common stock during the Class Period.  BR&B partners Jeff Golan (jgolan@barrack.com), Rob Hoffman (rhoffman@barrack.com), Jeffrey A. Barrack (jbarrack@barrack.com), and Chad Carder (ccarder@barrack.com) and BR&B associate Meghan Talbot (mtalbot@barrack.com) are litigating the Energy Transfer case and are available to provide additional information upon request.