Based on an Associated Press news report on November 12, we now know the FBI is investigating possible improprieties in the way Sunoco obtained environmental permits. In response to that, several legal firms have been seeking out investors for possible class-action lawsuits.
Leading the charge is Boston-based Thornton Law Firm LLP, which specializes in class-action cases. Thornton Law has already filed its case in Federal Court in Dallas. The case was filed on November 20, just 8 days after the AP report.
The basic argument of the lawsuit is that the revelation of the FBI investigation caused the stock of Energy Transfer, Sunoco’s parent, to lose 6.77% over the following two days. According to the suit, this selloff was triggered because Sunoco had failed to disclose that the company’s permits from the Department of Environmental Protection (DEP) “were secured via bribery and/or other improper conduct.”
Energy Transfer stock (symbol “ET”) has been trading between $11 and $13 for the last couple of months. Its low point was $11.16 on November 13 (the day after the AP report), which is close to its four-year low.
The defendants named in the suit are Energy Transfer LP, plus individual officers Kelcy Warren (ET’s CEO), John McReynolds (ET’s President at the time the disputed permits were issued), and Thomas Long (ET’s CFO). The naming of the three corporate officers is significant because (under the Sarbanes-Oxley Act of 2002) they are responsible for certifying the truthfulness of financial reports—and those reports never disclosed how the DEP permits were obtained.
Was the ET annual report misleading? The Thornton Law filing covers everyone who acquired ET shares between February 25, 2017, and November 11, 2019. The November 2019 date was chosen because it was the last trading day before the AP report about the FBI investigation. The February 2017 date was chosen because on the prior evening (after trading hours) ET filed its 2016 Form 10-K, the annual report required by the federal Securities and Exchange Commission. The DEP had issued the disputed permits two weeks before the 10-K was filed.
According to the lawsuit, that 10-K was misleading. The 10-K stated that:
We believe that we have satisfactory title to or valid rights to use all of our material properties. … In addition, we believe that we have, or are in the process of obtaining, all required material approvals, authorizations, orders, licenses, permits, franchises and consents of, and have obtained or made all required material registrations, qualifications and filings with, the various state and local government and regulatory authorities which relate to ownership of our properties or the operations of our business.
The suit states that the individual defendants (Warren, McReynolds, and Long) “were provided with copies of Energy Transfer’s SEC filings and press releases alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or to cause them to be corrected. Because of their positions with Energy Transfer, and their access to material information available to them but not to the public, the Individual Defendants knew that the adverse facts specified herein had not been disclosed to and were being concealed from the public, and that the positive representations being made were then materially false and misleading.”
Did ET violate its own Code of Business Conduct and Ethics? The lawsuit cites the “Code of Business Conduct and Ethics” that appears in ET’s 10-Ks. The Code states that It is against ET’s policy “to authorize payment of or to use [ET] funds or personal funds for Sensitive Payments or other similar payment, whether lawful or unlawful, designed to secure special treatment for [ET]. It is also contrary to the policy of the Partnership Group to employ any intermediary to make such payments or to disguise such payment(s) as a commission, refund or in any other manner.”
The definition of “Sensitive Payments” includes “receipts from or payments to governmental officials or employees” and “corporate political contributions”.
If ET got special treatment from Governor Wolf’s office as a result of campaign contributions, that would be a violation of this policy.
A series of misleading statements and documents. The lawsuit lists various financial reports and press releases to buttress its claim that investors were misled. In its summary of them, it concludes:
Defendants made false and/or misleading statements, as well as failed to disclose material adverse facts about [ET’s] business, operational and compliance policies. Specifically, Defendants made false and/or misleading statements and/or failed to disclose that:
- Energy Transfer’s permits to conduct the Mariner East pipeline project in Pennsylvania were secured via bribery and/or other improper conduct;
- the foregoing misconduct increased the risk that [ET] and/or certain of its employees would be subject to government and/or regulatory action, thereby depreciating the [value of ET’s shares]; and
- as a result, [ET’s] public statements were materially false and misleading at all relevant times.
Thornton Law will try to reach as many ET investors as possible for this lawsuit, including by use of ET’s own documents, which Thornton will attempt to obtain during the discovery phase of the suit.
Thornton is demanding a jury trial in this case.
The significance of this case. In previous blog posts, I have posed the question of whether top management was really being kept informed about the troubles of Mariner East. Based on the limited knowledge they exhibited in response to questions in their quarterly analysts’ briefings, it seemed likely that people reporting to them were only telling top management what they wanted to hear.
If it does nothing else, this lawsuit will get their full attention. The named corporate officers—Warren, McReynolds, and Long—could be personally found guilty of crimes, depending on the outcome of this case.
The details of who facilitated the premature issuing of the permits, how and why they did so, and whether top management knew of it (or even directed it), will be central to the outcome.
It will likely take years for this case to makes its way through the legal process (if indeed it actually goes to trial). It is possible that in the meantime the construction of the pipeline may be completed—or may be completely halted by other regulatory or legal events. Whatever happens with it, we’ll keep you posted.