A group of investors in Dallas-based Zion Oil & Gas has dropped a federal class action lawsuit that alleged the faith-based company committed securities fraud by misleading investors about a U.S. Securities and Exchange Commission investigation of the company, making false statements about its exploration activities in Israel and even paying a Christian minister to promote the company’s stock.
The development follows a March 3 ruling issued by U.S. District Judge Brantley Starr of the Northern District of Texas that granted Zion’s motion to dismiss, the judge’s first decision in a securities class action case since taking the bench last year. As is standard in securities litigation, Judge Starr gave the plaintiffs the opportunity to re-plead their claims, but when the 28-day deadline approached, they decided to drop their case instead.
The March 30 dismissal mimics a similar ending to a parallel derivative lawsuit that the investors filed in Delaware federal court against Zion’s board of directors that posed the same allegations. That lawsuit was dismissed in November.
“I think the voluntary decision the plaintiffs made to dismiss their lawsuit is reflective of the strength of the court’s ruling,” Dallas Baker Botts partner Jessica Pulliam, the lead attorney for Zion, told The Texas Lawbook on Tuesday afternoon. “Zion made extensive efforts to give the appropriate disclosures to investors and we certainly agree with the results here.”
Lawyers for the plaintiffs, led by investors Robert Peak, Cindy Hurrelbrink Peak and Lawrence Davis, have not responded to requests for comment.
The plaintiffs filed the Dallas lawsuit in August 2018 after a series of events — particularly the news of an SEC investigation of Zion — caused the company’s stock to plummet. Founded in 2000, Zion’s biblical-based mission is to discover oil in Israel to help establish the country’s political and economic independence. It has no revenue, instead relying on capital raises as its source of income.
The plaintiffs stated the class period was from Feb. 13, 2018 — when Zion launched a “bait-and-switch campaign” purporting to have made significant progress toward discovering oil and gas in Israel — to Nov. 30, 2018 — 10 days after the company announced the well was not commercially viable, which caused the stock to plummet from $1.19 per share to 51 cents per share.
News of the SEC investigation surfaced after a stock-shorter under the alias “FuzzyPanda” posted on its Twitter account that it had discovered Zion was part of an undisclosed SEC investigation after submitting a Freedom of Information Act request with the SEC.
That led to media reports, including investigative pieces by the Financial Times, that raised questions about Zion’s substantial marketing expenses, excessive employee compensation and certain accounting irregularities in Zion’s financial statements.
Zion initially denied an SEC investigation was underway, but later acknowledged that it had received a subpoena from the SEC’s Fort Worth Regional Office to produce documents. By September 2018, Zion CEO Victor Carrillo had resigned, but the company said his departure was unrelated to the investigation.
Zion moved to dismiss the lawsuit in March 2019, arguing that the plaintiffs’ claims “did not come close” to meeting the stringent pleading standards established under the Private Securities Litigation Reform Act (PSLRA).
“Rather than satisfy the rigorous pleading standards for claiming securities fraud, the complaint mocks the deeply-held religious faith of Zion’s leadership team,” the motion to dismiss says. “But even the complaint’s selective quotations from Zion’s public statements demonstrate that the company is transparent with investors about the risk of investing in its oil exploration activities in Israel.”
One testament to its transparency, Zion argued, was that it was always upfront with investors in SEC filings and press releases that it had no revenue from its oil and gas exploration and that it relied on investments — “none of which can be assured.”
Moreover, at the time Zion denied existence of an SEC investigation, the company, too, was in the dark; the SEC had not yet made contact with them, Zion said.
In a 14-page opinion, Judge Starr sided with Zion, ruling that the plaintiffs’ allegations lacked standing and that they failed to adequately plead their claims that Zion violated the Securities Act of 1933 and the Securities Exchange Act of 1934.
One legal area the judge focused on heavily was falsity — or the plaintiffs’ argument that Zion’s statements or omissions were false at the time they were made to investors. Judge Starr ruled the plaintiffs had not met the burden to establish that.
“It is a high hurdle indeed to plead that an entity subject to an investigation that had not resulted in a subpoena had a duty to state it was or might be under investigation,” the judge wrote.
The judge declined to rule on whether the plaintiffs had adequately pled scienter — one’s knowledge of their false statements or severe recklessness toward them at the time they were made — because he determined that falsity did not exist to begin with.
“Falisty and scienter are first cousins in a case such as this,” Judge Starr wrote.
With respect to the plaintiffs’ allegations that it paid Christian ministers such as Dr. David Jeremiah to promote Zion in sermons, Judge Starr ruled that the plaintiffs have yet to sue Dr. Jeremiah himself or argue that Zion controlled Dr. Jeremiah and his sermons — “the farthest standard in this area of the law a court has appeared to reach.”
The plaintiffs’ lawyers were Dallas attorney Willie Briscoe of The Briscoe Law Firm and Alexander Hood, Jeremy Lieberman, Michele Carino, and Patrick Dahlstrom of New York-based plaintiff firm Pomerantz.