FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
CLAUDE A. REESE, individually and
on behalf of all others similarly
No. 10-35128
situated,
Plaintiff-Appellee,
D.C. No.
2:08-cv-01008-MJP
v.
OPINION
BP EXPLORATION (ALASKA) INC.,
Defendant-Appellant.
Appeal from the United States District Court
for the Western District of Washington
Marsha J. Pechman, District Judge, Presiding
Argued and Submitted
March 7, 2011—Seattle, Washington
Filed June 29, 2011
Before: M. Margaret McKeown, Raymond C. Fisher, and
Ronald M. Gould, Circuit Judges.
Opinion by Judge Gould
8757
8760 REESE v. BP EXPLORATION
COUNSEL
Diane L. McGimsey of Sullivan & Cromwell LLP, Los Ange-
les, California, and David C. Lundsgaard of Graham & Dunn
P.C., Seattle, Washington, for defendant-appellant BP Explo-
ration (Alaska) Inc.
Thomas A. Dubbs and Javier Bleichman of Labaton Sucha-
row LLP, New York, New York, and Robert D. Stewart and
Timothy M. Moran of Kipling Law Group PLLC of Seattle,
Washington, for plaintiff-appellee Claude A. Reese.
OPINION
GOULD, Circuit Judge:
BP Exploration (Alaska) Inc. (“BPXA”) appeals the district
court’s order granting in part and denying in part BPXA’s
motion to dismiss a securities fraud action filed against it by
Claude A. Reese (“Reese”) on behalf of a class of purchasers
of BP p.l.c. shares. On an interlocutory appeal, which was
accepted by our court, BPXA asserts that Reese’s surviving
claims do not state a claim, warranting dismissal under Fed-
eral Rule of Civil Procedure 12(b)(6), because he has pled
neither an actionable misrepresentation made by or attribut-
able to BPXA nor sufficient evidence of scienter. Reese, in
REESE v. BP EXPLORATION 8761
turn, urges that we affirm the district court on the issues certi-
fied for interlocutory appeal and that we reverse part of the
district court’s order granting partial dismissal of his claims,
or, alternatively, that we vacate the order granting interlocu-
tory appeal.
We have jurisdiction pursuant to 28 U.S.C. § 1292(b). We
hold that BPXA’s breach of a contractual promise of specific
future conduct, even though the contract is filed in conjunc-
tion with U.S. Securities and Exchange Commission (“SEC”)
reporting requirements, was not a sufficient foundation for a
securities fraud action. We decline Reese’s invitation to
review other issues that were not certified for interlocutory
appeal. In light of our conclusion that breached contractual
obligations do not constitute misrepresentations by BPXA
that are actionable under the securities laws, we need not
reach the issue of scienter.
I
This suit follows BPXA’s temporary shut-down of its pipe-
lines and oil production in Prudhoe Bay, Alaska, upon its dis-
covery on August 6, 2006, of a leak in a pipeline located in
its Prudhoe Bay Eastern Operating Area. The leak was found
shortly after BPXA’s discovery, on March 2, 2006, of a large
spill of more than 200,000 gallons of oil that had leaked from
another pipeline in the Western Operating Area of Prudhoe
Bay. Both leaks resulted in substantial part from internal cor-
rosion, caused by bacterial colonies that had formed inside
BPXA’s pipelines due to the presence of sediment and low-
flow conditions. BPXA pled guilty on October 24, 2007, to a
single count of violating the Clean Water Act, 33 U.S.C.
§§ 1319(c)(1), 1321(b)(3), for the negligent discharge of a
harmful quantity of oil to a water of the United States. In its
plea agreement, BPXA said that it believed that corrosion of
its pipelines was a low probability but admitted that it was
aware of sediment buildup before the spills and failed to “pig”1
1
The term “pig” comes from the term “pipeline inspection gauge.” Pig-
ging consists of (a) cleaning pipelines to rid them of sediment and bacteria
8762 REESE v. BP EXPLORATION
the pipelines or take other necessary action to prevent the
leaks.
A
Asserting claims arising under Sections 10(b), 18, and
20(a) of the Securities and Exchange Act as amended, 15
U.S.C. §§ 78b(b), 78r, and 78t(a), and Rule 10b-5 thereunder,
17 C.F.R. § 240.10b-5, Reese brings a class action against BP
p.l.c.; its subsidiaries BP America, Inc. and BPXA; and four
corporate officers (“Defendants”) on behalf of all persons
who acquired BP p.l.c. ordinary shares or American Deposi-
tory Receipts (“ADRs”) during the period of March 31, 2005
through August 4, 2006 (“class period”).2 Reese’s consoli-
dated class action complaint3 alleges that, as a consequence of
the leaks and the shutdown of BPXA’s operations in Prudhoe
Bay, BP p.l.c.’s stock price fell, and investors lost billions of
dollars in market capitalization. According to Reese, the
and (b) pushing an in-line inspection tool through the pipelines to assess
the presence and extent of any internal corrosion.
2
Section 10(b) of the Securities Exchange Act of 1934 makes it unlaw-
ful “[t]o use or employ, in connection with the purchase or sale of any
security . . . any manipulative or deceptive device or contrivance in contra-
vention of such rules and regulations as the [SEC] may prescribe as neces-
sary or appropriate in the public interest or for the protection of investors.”
15 U.S.C. § 78j(b). Pursuant to this section, the SEC promulgated Rule
10b-5, which makes it unlawful, among other things, “[t]o make any
untrue statement of a material fact or to omit to state a material fact neces-
sary in order to make the statements made, in light of the circumstances
under which they were made, not misleading.” In re Cutera Sec. Litig.,
610 F.3d 1103, 1108 (9th Cir. 2010) (quoting 17 C.F.R. § 240.10b-5(b)
(internal quotation marks omitted)).
3
Reese filed this complaint after the district court consolidated similar
securities fraud actions and selected a lead plaintiff for the case, pursuant
to the Private Securities Litigation Reform Act. The case was transferred
to the Western District of Washington under 28 U.S.C. § 1404. Reese
thereafter filed an amended consolidated class action complaint that is not
at issue in this appeal.
REESE v. BP EXPLORATION 8763
August 2006 leak occurred despite BPXA’s reassurances to
investors that the corrosion leading to the earlier leak was an
anomaly and that BPXA was taking necessary precautions to
avoid another accident. The suit alleges that Defendants knew
about corrosion in the Prudhoe Bay pipelines but did not take
corrective action or disclose “the foreseeable risk” that BPXA
would need to curtail its oil production as a result. Reese
claims to have suffered economic loss and damages as a result
of purchasing overpriced shares of BP p.l.c., in reliance on
Defendants’ misleading statements and omissions about
BPXA’s Prudhoe Bay operations.
To plead a private damages action for violation of § 10(b)
and Rule 10b-5, a plaintiff must allege: (1) a material misrep-
resentation (or omission), (2) made with scienter, (3) on
which plaintiff relied, (4) that proximately caused (5) eco-
nomic loss, (6) in connection with the purchase or sale of a
security. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42
(2005). Only the first two elements are at issue in this appeal.
(1)
Reese’s complaint lists many statements that he alleges are
actionable material misrepresentations or omissions attribut-
able to Defendants for the purposes of a securities fraud
action. These statements include three remarks allegedly
made by defendant Maureen Johnson, BPXA’s Senior Vice
President of the Greater Prudhoe Bay Unit, about the condi-
tions of BPXA’s pipelines during the class period. Reese also
alleges that BPXA made false and misleading statements
through the public SEC filings of the BP Prudhoe Bay Roy-
alty Trust (“Trust”).
The Trust is a Delaware business trust that was created for
the purpose of distributing a Royalty Interest derived from oil
production at Prudhoe Bay to purchasers of Trust units, which
are traded on the New York Stock Exchange. The Trust was
established in 1989 pursuant to the BP Prudhoe Bay Royalty
8764 REESE v. BP EXPLORATION
Trust Agreement (“Trust Agreement”), entered into by BPXA
and The Standard Oil Company (“Standard Oil”) with trustees
The Bank of New York and F. James Hutchinson. The Trust
Agreement provides, in relevant part:
Section 4.05 — Information to be Supplied by
[BPXA]. [BPXA] shall provide to the Trustee on a
timely basis upon request such information not
known or otherwise available to the Trustee concern-
ing the Royalty Interest . . . as shall be necessary to
permit the Trustee to comply with respect to the
Trust with the reporting obligations of the Trust pur-
suant to the Securities Exchange Act of 1934, as
amended, the requirements of any stock exchange on
which the Units are listed and this Agreement and
for any other reasonable purpose of the Trust.
***
Section 6.01. — General Authority . . . [BPXA] and
the Trustee are hereby authorized to make and shall
be responsible for all filings on behalf of the Trust
with the Securities and Exchange Commission [as
legally required].
When the Trust was created, BPXA and Standard Oil also
executed an Overriding Royalty Conveyance agreement
(“ORC Agreement”) to govern the details of the Royalty
Interest that the Trust was to distribute. Through the ORC
Agreement, BPXA granted Standard Oil the right to receive
the Royalty Interest, which included a share of each day’s
production from Prudhoe Bay. Standard Oil then conveyed
that interest to the Trust pursuant to the Trust Agreement.
As part of the ORC Agreement, BPXA contracted to oper-
ate Prudhoe Bay according to a “Prudent Operator Standard.”
Namely, BPXA agreed to “conduct and carry on the develop-
ment, exploration, production, maintenance and operation of
REESE v. BP EXPLORATION 8765
[Prudhoe Bay] with reasonable and prudent business judg-
ment, in accordance with . . . good oil and gas field practices,
as a reasonable and prudent operator . . . .”
During each quarter of the class period, the Trust attached
to its SEC filings both the ORC Agreement, with its “Prudent
Operator Standard” provision, and the Trust Agreement, with
its discussion of BPXA’s role in the Trust’s SEC filings.
Relying on the premise that these agreements should be read
together, Reese asserts that “the Trust Agreement establishes
that the Royalty Trust’s filings with the SEC constitute state-
ments made by BPXA” and that the Trust’s repeated filing of
the ORC Agreement with the SEC “represented to the public”
that BPXA was maintaining its contractual obligation to oper-
ate in accordance with the Prudent Operator Standard.
Reese’s complaint further alleges that “at the time of these fil-
ings, the statements that BPXA was abiding by the Prudent
Operator Standard were materially false and misleading”
because Defendants did not disclose, among other things, that
the pipelines at Prudhoe Bay were under-inspected, under-
maintained, and subject to a severe risk of corrosion-related
failure; that BP had been warned that its pipelines were
severely corroded; and that BP had not taken corrective action
despite warnings.
(2)
As regards scienter, Reese claims that BPXA “had actual
knowledge of the misrepresentations and omissions of mate-
rial fact [alleged], or acted with deliberate disregard for the
truth” in failing to ascertain and disclose them, “for the pur-
pose and effect of concealing Defendants’ operations and
business affairs from the investing public, thereby supporting
the artificially inflated price of BP [p.l.c.]’s ordinary shares
and ADRs.” As evidence purportedly raising a strong infer-
ence of BPXA’s state of mind,4 Reese’s complaint relies on,
4
In private securities action requiring proof of scienter, the complaint
must, “with respect to each act or omission alleged . . . , state with particu-
larity facts giving rise to a strong inference that the defendant acted with
the required state of mind.” 15 U.S.C. § 74u-4(b)(2)(A).
8766 REESE v. BP EXPLORATION
among other things, BPXA’s entry of a guilty plea in a crimi-
nal case for its violation of the Clean Water Act in connection
with the Prudhoe Bay oil spills.
B
Defendants filed a motion to dismiss Reese’s complaint
pursuant to Federal Rule of Civil Procedure 12(b)(6), which
the district court granted in part and denied in part. The dis-
trict court dismissed as time-barred Reese’s claim for viola-
tions of § 18 and also dismissed BP America, Inc. and one of
the corporate officers as defendants. The district court found
that the majority of the statements that Reese alleged to be
fraudulent—including the three statements allegedly made by
defendant Johnson—did not meet the heightened pleading
standards of the Private Securities Litigation Reform Act of
1995 (“PSLRA”). However, the district court found that
Reese had adequately pled § 10(b) and Rule 10b-5 violations
by defendant BPXA and, in part predicated on the survival of
those claims, had adequately pled personal control liability
pursuant to § 20(a) against BP p.l.c. and the three remaining
corporate officers. The parties filed cross-motions for recon-
sideration, and BPXA moved for certification of an interlocu-
tory appeal. The district court denied in part and granted in
part the parties’ motions for reconsideration. It granted
BPXA’s motion for interlocutory appeal. We approved the
interlocutory appeal.
(1)
In allowing the § 10(b) and Rule 10b-5 claims to proceed,
the district court found that Reese had adequately pled one
alleged misstatement or omission. It concluded that Reese
could use, “as evidence of false or misleading statements
upon which any investor was permitted to rely,” the Trust’s
“quarterly filings with the [SEC] made in connection with
BPXA’s obligations under the [Trust Agreement] throughout
the purported Class Period (which included documents
REESE v. BP EXPLORATION 8767
wherein Defendants represented that they were in compliance
with Alaska’s Prudent Operator Standard).” The district court
observed that BPXA could not evade the principle of Brody
v. Transitional Hospitals Corporation, 280 F.3d 997 (9th Cir.
2002), that a statement is false if it “affirmatively create[s] an
impression of a state of affairs that differs in a material way
from the one that actually exists,” by arguing that the state-
ment was private contractual language. Id. at 1006. The dis-
trict court held it was immaterial that the SEC filings were
made by the Trust, and not BPXA, because “the Securities
Act makes no allowance for how the allegedly false or mis-
leading statement is made known to the public.” The district
court reasoned that there was no evidence that BPXA tried to
have the contract withdrawn as an exhibit to the SEC filings
and stated that “BPXA was content to have the document
stand as a representation to the SEC that permitted them to
continue their business arrangement” with the Trust.
(2)
The district court determined that the plea agreement exe-
cuted by BPXA, and the admissions contained within it, gave
evidence of a strong inference that BPXA acted with deliber-
ate recklessness and that Reese had thus adequately pled
scienter. The district court concluded that “[t]he fact that the
agreement itself reflects a finding of criminal negligence . . .
does not mean that this Court is confined to an identical con-
clusion on the same facts.”
(3)
Observing that there was inadequate precedent squarely on
point, the district court granted BPXA’s motion for interlocu-
tory appeal and, pursuant to 28 U.S.C. § 1292(b), granted cer-
tification on the following two questions:
1. Whether a contract to which a defendant is a
party, filed in conjunction with SEC reporting
8768 REESE v. BP EXPLORATION
requirements and promising specific conduct by
the defendant, can be used as the foundation for
a securities fraud action by a nonparty to the
contract.
2. Whether the facts contained in a party’s admis-
sion of criminal negligence as part of a misde-
meanor guilty plea may be used as evidence of
civil misconduct by the admitting party which
requires an allegation of reckless or intentional
misconduct as proof of scienter.
We granted BPXA’s petition for permission to appeal.
II
A non-final order may be certified for interlocutory appeal
where it “involves a controlling question of law as to which
there is substantial ground for difference of opinion” and
where “an immediate appeal from the order may materially
advance the ultimate termination of the litigation.” 28 U.S.C.
§ 1292(b). Although we defer to the ruling of the motions
panel granting an order for interlocutory appeal, “we have an
independent duty to confirm that our jurisdiction is proper.”
Kuehner v. Dickinson & Co., 84 F.3d 316, 318-19 (9th Cir.
1996). Here, we conclude that the requirements of § 1292(b)
are met.
Reese contends that there exists no substantial ground for
difference of opinion because there are no cases directly con-
flicting with the district court’s construction of the law. But,
as we see it, “this appeal involves an issue over which reason-
able judges might differ” and such “uncertainty provides a
credible basis for a difference of opinion” on the issue. In re
Cement Antitrust Litig., 673 F.2d 1020, 1028 (9th Cir. 1982)
(Boochever, J., dissenting on other grounds). As we have pre-
viously noted, “[c]ourts traditionally will find that a substan-
tial ground for difference of opinion exists where ‘. . . novel
REESE v. BP EXPLORATION 8769
and difficult questions of first impression are presented,’ ” as
is the case here. Couch v. Telescope Inc., 611 F.3d 629, 633
(9th Cir. 2010) (quoting 3 Federal Procedure, Lawyers Ed.
§ 3:212 (2010)). Our interlocutory appellate jurisdiction does
not turn on a prior court’s having reached a conclusion
adverse to that from which appellants seek relief. A substan-
tial ground for difference of opinion exists where reasonable
jurists might disagree on an issue’s resolution, not merely
where they have already disagreed. Stated another way, when
novel legal issues are presented, on which fair-minded jurists
might reach contradictory conclusions, a novel issue may be
certified for interlocutory appeal without first awaiting devel-
opment of contradictory precedent.5
Reese also contends that certification was improvidently
granted because a decision in BPXA’s favor will not resolve
all of Reese’s claims against it, for Reese has filed an
amended consolidated class action complaint asserting new
claims against the defendant company. However, neither
§ 1292(b)’s literal text nor controlling precedent requires that
the interlocutory appeal have a final, dispositive effect on the
litigation, only that it “may materially advance” the litigation.
28 U.S.C. § 1292(b). The district court correctly concluded
that our reversal “may” take BPXA, as a defendant, and
Reese’s control claims against all remaining defendants out of
the case. That is sufficient to advance materially the litigation,
and therefore certification of the interlocutory appeal was per-
missible.
5
Adopting the formalistic requirement, urged by Reese, that adverse
authority develop around an issue before we review it on interlocutory
appeal could lead to unnecessary, protracted litigation and a considerable
waste of judicial resources. We decline to adopt this rigid approach
towards § 1292(b), whose use has been wisely targeted to avoid such
undesirable consequences. See 16 Charles Alan Wright & Arthur R. Mil-
ler, Federal Practice & Procedure § 3929 (2d ed. 1987) (discussing flexi-
ble approach of appellate courts towards interlocutory appeals).
8770 REESE v. BP EXPLORATION
We hold that the order granting the interlocutory appeal
need not be vacated. We proceed to the merits of the securi-
ties laws issues presented.
III
Although the district court certified only two questions, in
our exercise of discretion, we “may address any issue fairly
included within the certified order because it is the order that
is appealable, and not the controlling question identified by
the district court.” Rivera v. NIBCO, Inc., 364 F.3d 1057,
1063 (9th Cir. 2004) (quoting Yamaha Motor Corp., U.S.A. v.
Calhoun, 516 U.S. 199, 205 (1996) (internal quotation marks
omitted)); see South Ferry LP v. Killinger, 542 F.3d 776, 786
(9th Cir. 2008) (“[W]e have jurisdiction to reach the merits of
the entire complaint because it was at issue in the certified
order.”). Reese asks us to extend our review beyond the issues
certified and to review the district court’s conclusion that
three allegedly false statements made by BPXA corporate
officer and individual defendant Johnson were not actionable.
We decline his invitation and focus on the certified questions.
Reese makes no attempt to argue that the additional issues
on which he seeks reversal would independently merit inter-
locutory review. Nor did he ask the district court, in his
motion for reconsideration, to reassess the rulings he now
asks us to reverse. That he did not find the district court’s
alleged error on these rulings so plain as to seek reconsidera-
tion counsels against our reviewing them on interlocutory
appeal. See Nunes v. Ashcroft, 375 F.3d 805, 807 (9th Cir.
2004) (“Reconsideration is appropriate if the district court . . .
committed clear error.” (quoting Sch. Dist. No. 1J v. ACandS,
Inc., 5 F.3d 1255, 1263 (9th Cir. 1993) (internal quotation
marks omitted))). Moreover, Reese has filed an amended con-
solidated class action complaint reasserting, with additional
reasons and support, the false and misleading nature of the
statements he now asks us to review. Because the district
court has not yet assessed whether the amended allegations
REESE v. BP EXPLORATION 8771
are adequate, it would be a waste of judicial resources for us
to review its rejection of the pre-amended version of those
allegations. Cf. Morrison-Knudsen Co., Inc. v. Archer, 655
F.2d 962, 966 (9th Cir. 1981) (“One of the principal reasons
a Court of Appeals will exercise its discretion not to grant
applications under section 1292(b) is the likelihood or proba-
bility of the appellate court’s having to issue multiple opin-
ions on the same or closely related issues of law or fact in the
case.”).
Reese’s decision not to file a cross-petition under Federal
Rule of Appellate Procedure 5(b)(2) also weighs against
entertainment of the rulings he now asks us to reverse. Rule
5(b)(2) provides that, when a party files a petition seeking dis-
cretionary appeal, other parties to the case “may file an
answer in opposition or a cross-petition within 10 days after
the petition is served.” Fed. R. App. P. 5(b)(2). BPXA con-
tends, we think with some merit, that this time requirement
would be meaningless if the filing of a cross-petition were
optional. Consistent with this reasoning, other circuit courts
have held that a Rule 5(b)(2) cross-appeal is a prerequisite to
appellate review of issues raised by appellees on interlocutory
appeal. E.g., Sikes v. Teleline, Inc., 281 F.3d 1350, 1367 n.44
(11th Cir. 2002) (“The plaintiff’s failure to file a cross-appeal
violates the requirement of Fed. R. App. P. 5(b)(2) and means
that the plaintiffs have not preserved this issue for appeal.”),
abrogated on other grounds by Bridge v. Phoenix Bond &
Indem. Co., 553 U.S. 639 (2008); Tranello v. Frey, 962 F.2d
244, 248 (2d Cir. 1992) (“The failure to file the petition for
permission to cross-appeal . . . is a jurisdictional defect, bar-
ring this Court from hearing [plaintiff’s] cross-appeal.”).
An appellee is well-advised, in seeking interlocutory
review of issues not certified, to file a Rule 5(b)(2) cross-
petition. Its failure to do so and election to raise an issue only
in its answering brief disadvantages appellants, who are
unable to anticipate presciently and to address adequately the
issue in their opening brief. Reviewing an issue raised by a
8772 REESE v. BP EXPLORATION
party who has not filed a cross-petition also risks offending
the party presentation principle, which makes clear that “an
appellate court may not alter a judgment to benefit a nonap-
pealling party.” Greenlaw v. United States, 554 U.S. 237, 244
(2008). Particularly here, where a decision reversing the dis-
trict court’s rulings against Reese would affect not only appel-
lant BPXA but also defendant Johnson, who is not a party to
this appeal, proceeding absent a cross-appeal bringing in all
affected parties is unlikely “to advance institutional interests
in fair notice and repose.” Id. at 245 (quoting El Paso Natural
Gas Co. v. Neztsosie, 526 U.S. 473, 480 (1999) (internal quo-
tation marks omitted)). However, we need not now determine
with finality whether a party’s failure to cross-appeal pursuant
to Rule 5(b)(2) curtails the jurisdictional scope of our review
on interlocutory appeal because, for the reasons stated above,
we decline to exercise any discretion we may have to review
the additional issues that Reese raises. See Roth v. King, 449
F.3d 1272, 1283 (D.C. Cir. 2006) (“We need not resolve these
knotty issues raised in connection with § 1292(b) and Rule 5.
The one thing that is clear here is that any review of appel-
lees’ purported cross-appeal is at most discretionary with this
court.”). Again, we prefer to keep our focus on the issues cer-
tified for interlocutory appeal.
IV
The issues before us, then, narrow to whether the district
court erred in permitting Reese’s private action for securities
fraud to stand on the basis of the alleged misstatement by
BPXA, contained within a contract filed with the SEC, and
whether Reese’s allegations adequately plead scienter.
(1)
[1] In assessing whether Reese has adequately pled a pri-
vate federal action for securities fraud, we review de novo the
district court’s partial denial of BPXA’s motion to dismiss.
See Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d
REESE v. BP EXPLORATION 8773
1025, 1030 (9th Cir. 2008). We accept all well-pled factual
allegations as true and construe them in the light most favor-
able to Reese. In re Gilead Scis. Sec. Litig., 536 F.3d 1049,
1055 (9th Cir. 2008). However, in pleading fraud, “a party
must state with particularity the circumstances constituting
fraud or mistake,” Fed. R. Civ. P. 9(b), and Reese must plead
plausible allegations, Ashcroft v. Iqbal, 129 S. Ct. 1937,
1949-50 (2009); Cafasso v. Gen. Dynamics C4 Sys., 637 F.3d
1047, 1055 (9th Cir. 2011). The PSLRA also requires that a
complaint alleging misleading statements or omissions “spec-
ify each statement alleged to have been misleading, the reason
or reasons why the statement is misleading, and, if an allega-
tion regarding the statement or omission is made on informa-
tion and belief, . . . all facts on which that belief is formed.”
15 U.S.C. § 78u-4(b)(1). See No. 84 Emp’r-Teamster Joint
Council Pension Trust Fund v. Am. W. Holding Corp., 320
F.3d 920, 937-38 (9th Cir. 2003) (discussing scienter pleading
requirements); In re Silicon Graphics Sec. Litig., 183 F.3d
970, 979 (9th Cir. 1999) (same); see also Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007) (“[A]n
inference of scienter must be more than merely plausible or
reasonable—it must be cogent and at least as compelling as
any opposing inference of nonfraudulent intent.”); South
Ferry LP, 542 F.3d at 782-85 (9th Cir. 2008) (discussing
scienter pleading requirements after Tellabs). Thus, the mis-
representation claims pled must satisfy the “particularity”
requirement of Rule 9(b) of the Federal Rules of Civil Proce-
dure, the “plausibility” requirement of Iqbal, and the scienter
requirement of the PSLRA.
(2)
[2] A statement or omission is misleading in the securities
fraud context “if it would give a reasonable investor the
‘impression of a state of affairs that differs in a material way
from the one that actually exists.’ ” Berson v. Applied Signal
Tech., Inc., 527 F.3d 982, 985 (9th Cir. 2008) (quoting Brody,
280 F.3d at 1006). The public filing of BPXA’s contract, con-
8774 REESE v. BP EXPLORATION
taining its promise to conduct its Prudhoe Bay oil operations
as a prudent operator, is an actionable misstatement if a rea-
sonable investor would view it as a certificate of BPXA’s
compliance with that standard. Reese argues that there is a
presumption that parties comply with their contractual obliga-
tions, and so a reasonable investor would presume that BPXA
was complying with the Prudent Operator Standard when the
ORC Agreement was filed with the SEC. Reese contends that
BPXA’s contractual statement of future compliance was
transformed into a false “statement of current and ongoing
compliance” because of its repeated filing by the Trust, for
whose filings BPXA had contractual responsibility. He further
argues that BPXA had a duty to correct the false impression
by disclosing that it was not in compliance with the Prudent
Operator Standard. See In re Wells Fargo Sec. Litig., 12 F.3d
922, 926 (9th Cir. 1993) (stating that an omission is action-
able where a plaintiff alleges that a defendant “omitted to
state a material fact necessary to make the statements made,
in light of all the circumstances in which they were made, not
misleading” (quoting In re Apple Computer Sec. Litig., 886
F.2d 1109, 1113 (9th Cir. 1989) (internal quotation marks
omitted))).
[3] We disagree and reject Reese’s contention that the
Trust’s filing of the ORC Agreement, in compliance with its
legal obligations, would give a reasonable investor the
impression that BPXA was in compliance with the Prudent
Operator Standard provision of that agreement. That contract
provision, read literally, was “forward-looking” and not a
misrepresentation of current fact. “A ‘promise’ contained in
a contract is not a certification that the promisor will actually
perform the specified acts.” United States v. Blankenship, 382
F.3d 1110, 1133 (11th Cir. 2004); cf. Lockerby v. Sierra, 535
F.3d 1038, 1042 (9th Cir. 2008) (“The concept of ‘efficient
breach’ is built into our system of contracts, with the under-
standing that people will sometimes intentionally break their
contracts for no other reason than that it benefits them financial-
REESE v. BP EXPLORATION 8775
ly.”).6 We acknowledge that some investors might presume
that BPXA was in compliance with its contractual obligations.
Nonetheless, the breach of a contractual promise of future
performance typically does not constitute a misrepresentation
that will support an action for fraud. This is true both as a
general matter, see 26 Williston on Contracts § 69:11 (4th ed.)
(“It is well settled that a claim of fraud must rest on an inac-
curate assertion as to a matter of past or existing fact. As a
corollary of this basic proposition, . . . representations as to
expectations and predictions as to future results or events can-
not support a fraud claim.”), and in the context of private
securities litigation, see Foster v. Wilson, 504 F.3d 1046,
1051 (9th Cir. 2007) (“At most, the claim alleges a breach of
contract. Such a breach, however, does not constitute federal
securities fraud under § 10(b).”). This principle that contract
breach is not a sufficient predicate for securities fraud has
been followed both by our circuit in Foster and by courts of
other circuits. See Mills v. Polar Molecular Corp., 12 F.3d
1170, 1176 (2d Cir. 1993) (“The failure to carry out a promise
made in connection with a securities transaction is normally
a breach of contract. It does not constitute fraud unless, when
the promise was made, the defendant secretly intended not to
perform or knew that he could not perform.”); see also ATSI
Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 105 (2d Cir.
2007) (same); Gurary v. Winehouse, 235 F.3d 792, 801 (2d
Cir. 2000) (same); IDT Corp. v. eGlobe, Inc., 140 F. Supp. 2d
30, 35 (D.D.C. 2001) (same); First Lincoln Holdings, Inc. v.
Equitable Life Assurance Soc’y of the U.S., 164 F. Supp. 2d
383, 394 (S.D.N.Y. 2001) (same).7
6
In this regard, it has been observed that “[t]he only universal conse-
quence of a legally binding promise is, that the law makes the promisor
pay damages if the promised event does not come to pass. In every case
it leaves him free to break his contract if he chooses.” Oliver Wendell
Holmes, Jr., The Common Law 301 (Dover Publications, Inc. 1991).
7
We recently applied the same principle in holding that contract breach
did not provide an adequate predicate for a False Claims Act (“FCA”)
lawsuit. See Cafasso, 637 F.3d at 1057-58 (“[B]reach of contract claims
are not the same as fraudulent conduct claims, and the normal run of con-
tractual disputes are not cognizable under the [FCA].” (quoting United
States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 383
(4th Cir. 2008) (internal quotation marks omitted))).
8776 REESE v. BP EXPLORATION
[4] We recognize that even a promise that is forward-
looking at the time it is made could conceivably become “an
inaccurate assertion as to a matter of past or existing fact,” 26
Williston on Contracts § 69:11, if its repeated filing “create[s]
an impression of a state of affairs that differs in a material
way from the one that actually exists,” Brody, 280 F.3d at
1006. “[A] statement that is literally true can be misleading
and thus actionable under the securities laws.” Id. Reese
argues that—although the Trust’s filings, which included an
accurate copy of the 1989 ORC Agreement, were in a sense
“literally true,” id.—the repeated filing of the ORC Agree-
ment’s Prudent Operator Standard provision “became a state-
ment of current and ongoing compliance, which was false.”
We are not persuaded that Reese’s allegations, if credited, are
sufficient to show that BPXA affirmatively created such a
false impression. The 1989 prudent operator promise was not
only forward-looking in nature, but it was also contained in
a document attached to SEC filings made to fulfill unrelated
regulatory requirements.
In support of his contention that non-compliance with a
publicly-filed contract may constitute a material misrepresen-
tation supporting an action for securities fraud, Reese analo-
gizes the present situation to that in In re MobileMedia
Securities Litigation, 28 F. Supp. 2d 901 (D.N.J. 1998).
There, a corporate defendant filed a SEC Form 8-K that
included terms of a Credit Agreement that it had entered stat-
ing that its properties, equipment, and systems “are and will
be in compliance with all terms and conditions of the FCC
licenses.” Id. at 917, 939. Plaintiffs contended that the defen-
dant did not comply with those terms and conditions. Id. at
917. The district court concluded that “the inclusion of the
terms of the Credit Agreement in the Form 8-K[ ] stood as a
tacit representation that [the defendant] was in compliance
with those terms;” that, “[b]y signing the 1996 Form 8-K, [the
defendant] had an obligation not to mislead;” and that the
plaintiffs had therefore sufficiently stated claims under
§ 10(b) and Rule 10b-5. Id. at 939 n.25, 940.
REESE v. BP EXPLORATION 8777
[5] But, as BPXA correctly notes, MobileMedia involved
an express misrepresentation of present-existing fact and not
merely a promise of future performance. In reaching its con-
clusion that plaintiffs had sufficiently alleged misrepresenta-
tions of material fact, the court observed that “facts
demonstrating [that the defendant] was not in compliance
with the terms of the Credit Agreement from the moment it
was signed would be important to a reasonable investor.”
MobileMedia, 28 F. Supp. 2d at 939. MobileMedia is there-
fore consistent with the general principle that “[t]o be action-
able, a statement or omission must have been misleading at
the time it was made; liability cannot be imposed on the basis
of subsequent events.” In re NAHC, Inc. Sec. Litig., 306 F.3d
1314, 1330 (3d Cir. 2002). See Wortley v. Camplin, 333 F.3d
284, 294 (1st Cir. 2003) (“When the defendant makes a spe-
cific promise . . . to perform an act, while intending not to
perform the act, this may constitute a basis for a fraud find-
ing.” (emphasis added)). Reese does not allege that BPXA
was in breach of the ORC Agreement’s prudent operator obli-
gation, or that BPXA intended to breach the obligation, when
BPXA entered into the contract, and, in the circumstances
here, we cannot conclude, based on repeated filing of a
forward-looking promise alone, that BPXA made any state-
ment of current compliance as of the time of filing. Therefore,
to the extent that we might find MobileMedia persuasive in
other factual contexts, we conclude that it does not substan-
tially assist Reese in arguing that he has here pled a securities
fraud claim based on the contractual provision.
[6] We therefore decline to hold that a reasonable investor
would view the Trust’s subsequent, periodic filing of the ORC
Agreement as a certification of BPXA’s ongoing compliance
with the Prudent Operator Standard. The provision is quite
broad—BPXA agrees to conduct all aspects of its operations
“with reasonable and prudent business judgment” and “as a
reasonable and prudent operator.” These terms are generally
interpreted as requiring the operator, here BPXA, to use the
same practices as other, reasonable operators in the oil and
8778 REESE v. BP EXPLORATION
gas industry. See George A. Bibikos & Jeffrey C. King, A
Primer on Oil and Gas Law in the Marcellus Shale States, 4
Tex. J. Oil, Gas, & Energy L. 155, 162-63 (2008-09) (discuss-
ing requirements of prudent operator standard). BPXA’s obli-
gations under the ORC Agreement were not static but evolved
along with the industry and could change from one quarterly
SEC filing to the next. Further, the provision is one section of
a large and detailed contract whose main purpose was the
conveyance by BPXA of a Royalty Interest to Standard Oil.
The Trust was legally required to include the ORC Agreement
in its SEC filings, showing the Royalty Interest to which it
was due. Given the broad nature of the provision and the
Trust’s filing obligations, a reasonable investor would likely
view the Trust’s attachment of the ORC Agreement to its SEC
filings as a statement of the rights of the Trust and its unit
holders, not as certification by BPXA that all of its operations
were in compliance with the Prudent Operator Standard.
[7] BPXA’s contractual promise to act as a prudent opera-
tor did not expressly or implicitly assert that BPXA was in
full compliance with its obligations thereunder, and we do not
view the public filing of the ORC Agreement as the sort of
traditional fraudulent misrepresentation of fact that could
induce investors mistakenly to buy securities.8 We hold that,
8
Even if we read the periodic filings of the ORC Agreement as an
implicit statement of BPXA’s compliance with the Prudent Operator Stan-
dard, Reese’s claims would still fail because Reese’s allegations do not
support a finding that the Trust’s SEC filings are attributable to BPXA.
Reese alleges that BPXA shared responsibility for the Trust’s SEC fil-
ings, but he does not allege that BPXA actually participated in and had
authority over the Trust’s filing process. This is important because, under
the law of our circuit, defendants have been subject to primary liability
under § 10(b) for the misstatements of others only if defendants are
alleged to have been intricately involved or to have substantially partici-
pated in the making of those misstatements. See Howard v. Everex Sys.,
Inc., 228 F.3d 1057, 1061 n.5 (9th Cir. 2000) (“[S]ubstantial participation
or intricate involvement in the preparation of fraudulent statements is
grounds for primary liability even though that participation might not lead
REESE v. BP EXPLORATION 8779
in this case, the public filing of a contract containing a prom-
ise of future compliance did not, upon the contract’s breach
at a time after execution, provide an actionable misrepresenta-
tion for the purposes of a private damages action for securities
fraud.
(3)
[8] Because the claims before us must be dismissed for
failure to plead a misrepresentation under § 10(b) and Rule
10b-5, we need not reach the second certified issue on
scienter. Similarly, as they depend upon the presence of a
to the actor’s actual making of the statements.”); see also In re Cylink
Secs. Litig., 178 F. Supp. 2d 1077, 1084 (N.D. Cal. 2001).
The insufficiency of Reese’s pleadings are reinforced by the Supreme
Court’s recent opinion in Janus Capital Groups, Inc. v. First Derivative
Traders, No. 09-525, 564 U.S. ___ (June 13, 2011), which sets the plead-
ing bar even higher in private securities fraud actions seeking to hold
defendants primarily liable for the misstatements of others. See id., slip op.
at 12 (holding that the allegation that the defendant was significantly
involved in preparing the alleged misstatements was insufficient to state
a claim for primary liability under Rule 10b-5). There, the Court explained
that “[o]ne who prepares or publishes a statement on behalf of another is
not its maker” because “[w]ithout control, a person or entity can merely
suggest what to say, not ‘make’ a statement in its own right.” Id. at 6.
Accordingly, the Court held that, “the maker of a statement is the entity
with authority over the content of the statement and whether and how to
communicate it.” Id. at 8.
It is clear that Reese’s claims cannot be amended to meet this newly
enunciated standard. As was fatal to plaintiffs’ claims in Janus Capital
Groups, here only the Trust—not BPXA—bore a statutory obligation to
file with the SEC, and there is no allegation that BPXA made the filings
and falsely attributed them to the Trust. Id. at 11. Reese does not allege
that BPXA had ultimate authority over the Trust’s SEC filings. Although
the Trust Agreement provides that BPXA is “authorized to make and shall
be responsible for” the Trust’s filings, this provision does not demonstrate
BPXA had “ultimate authority over the statement, including its content
and whether and how to communicate it.” Id. at 6.
8780 REESE v. BP EXPLORATION
misrepresentation, Reese’s § 20(a) control liability claims also
fail.
REVERSED AND REMANDED.