In a divided ruling on Monday, the Colorado Supreme Court permitted a pension plan for law enforcement to sue a Denver-based oil and gas company for allegedly misleading investors in violation of a Depression-era law designed to prevent fraud.

The question for the state’s highest court was whether Jagged Peak Energy Inc. would be held liable for generic corporate statements of optimism when it debuted on the stock market – or if certain claims to investors were verifiably false. 

By a 5-2 decision, the Supreme Court believed the latter was true, giving the Oklahoma Police Pension and Retirement System a green-light to proceed with its civil lawsuit in state court.

OPPRS “plausibly alleged facts indicating that Jagged’s statements about its workforce experience and focus on decreasing costs, and its decision to omit information about disadvantageous contracts, were misleading at the time of the IPO,” wrote Justice Richard L. Gabriel, referring to the company’s initial public offering of stock in 2017.

Justice Monica M. Márquez disagreed, arguing that federal courts, in interpreting the Securities Act of 1933, do not give legal weight to corporations’ boasts about their “proven track record” and “expertise” because no reasonable investors would rely on such vague promises when making their decisions. She worried about the consequence of making it easier for people to sue companies in Colorado for routine corporate “puffery.”

“I am concerned that today’s decision lowers the bar and invites plaintiffs alleging Securities Act violations to forum shop in Colorado state courts,” Márquez wrote for herself and Chief Justice Brian D. Boatright.

Emily R. Garnett, a corporate litigator and former investigative attorney with the U.S. Securities and Exchange Commission, believed the majority’s ruling does not significantly depart from the way federal courts handle similar claims of wrongdoing.

“The reality is any decision that gives plaintiffs the opportunity to litigate the merits of the securities fraud claims is going to encourage future lawsuits in Colorado state courts,” she said.

Congress enacted the Securities Act following the stock market crash of 1929 in order to provide better transparency for investors. The law permits investors to sue when corporations, in their official filing statements, make an untrue representation that a reasonable person would rely on when deciding to buy or sell stocks. There is also liability if corporations omit material facts from their filings.

OPPRS, which has approximately 4,900 active members and 3,100 retirees, sued Jagged Peak for its poor performance on the stock market, alleging the company violated the Securities Act by making misleading, material statements to investors about its energy production capabilities.

While OPPRS pointed out several alleged flaws with Jagged Peak’s promises about its horizontal drilling in a West Texas basin, the appeal focused on two sets of comments. First, Jagged Peak represented that it would maximize returns through the “experience and expertise of our management and technical teams.”

Second, the company promised an “ongoing focus on reducing drilling times, optimizing completions and reducing costs.” Jagged Peak elaborated that it had decreased the amount of time it took to set up a well, and experienced a “significant decrease” in costs since 2014 through its “proven track record.”

A Denver District Court judge threw out the lawsuit, noting that such statements of “puffery and hopefulness” did not amount to violations of federal law. But in April of last year, a three-judge panel of the Court of Appeals reinstated some of OPPRS’ claims.

OPPRS had alleged that two of Jagged Peak’s geologists were inexperienced and incompetent, that the chief executive officer was aware of problems at drilling sites, and that another company executive steered contract work to a business associate, who, in turn, ran up costs to Jagged Peak. All of this, OPPRS alleged, was happening at the time of the stock offering, yet Jagged Peak failed to disclose it.

Based on Jagged Peak’s quantifiable claims about making its operations more efficient, the appellate panel disagreed that the company’s corresponding boasts about its expertise and focus on cost reduction were too vague to amount to a securities fraud claim.

“We view these statements as having specific meaning when read in context,” wrote Judge David J. Richman.

On appeal to the Supreme Court, Jagged Peak received support from the Securities Industry and Financial Markets Association, a trade group for asset managers and investment banks. It argued that “factual statements near puffery” were not enough to transform optimistic corporate promises into a federal violation.

“Permitting more meritless Securities Act lawsuits to survive,” the association warned, would raise costs for everyone involved in an initial public stock offering.

During oral arguments, Jagged Peak similarly contended that promises of “experience” were not something that could be measured objectively and, thus, could not be false.

“Why is that not objectively verifiable?” Gabriel responded. “When you say, ‘We’re gonna do great things through our very experienced staff,’ and there isn’t an experienced staff and you know it?”

The Supreme Court’s majority rejected the argument that the Court of Appeals had improperly transformed “puffery” statements into something legally meaningful. The appellate panel, wrote Gabriel, was permitted to consider the allegedly misleading statements “in context.”

“Here, evidence that one of Jagged’s two in-house geologists was right out of college (coupled with a Jagged executive’s statement that this lack of experience rendered the geologist ‘not qualified’) is one form of record evidence on which a fact-finder could reasonably rely to test Jagged’s assertions regarding its experience and expertise,” Gabriel observed.

Further, federal regulations require corporations to describe “known trends or uncertainties” that would likely have an effect on revenues. If, as OPPRS alleged, costs were going up due to various factors known to Jagged Peak, the company should have disclosed that information.

“Under Jagged’s apparent interpretation, virtually any statement containing the words ‘experience,’ ‘expertise,’ ‘track record,’ or ‘focus’ would be immaterial as a matter of law,” added Gabriel.

Márquez, in her dissent, argued that no reasonable investor would base their decisions on such “management-speak” alone. The majority’s approach ran counter to the practice in federal courts, and Gabriel had even acknowledged Jagged Peak’s statements about its quantifiable, historical performance were “accurate,” Márquez continued.

Attorneys for both sides did not respond to an email seeking comment.

The case is Jagged Peak Energy Inc. et al. v. Oklahoma Police Pension and Retirement System.