Highland Capital Mgmt., L.P. et al v. Ryder Scott Co. shows how far a plaintiff will reach to find deep pockets to pay for a bad investment. Here, the plaintiffs went after the reservoir engineers who made reserve estimates and to a purchaser who acquired notes after the plaintiff acquired theirs. There was a question about whether the engineers aided the brokers in the sale of the notes and whether proved reserve estimates constituted material representations. This was an appeal of a summary judgment, so nothing has been proven. Reversals of summary judgments are all about whether there are fact questions left for a jury to decide and not whether assertions have been proven.

Highland held unsecured interests in notes issued by Seven Seas, an oil and gas exploration company. Because the notes were sold and traded on the public markets they were subject to SEC regulations defining what an issuer can report as “proved reserves”. Highland’s purchase was based on estimates prepared by Ryder Scott, the reservoir-evaluation consulting firm. Seven Seas later issued secured notes to Chesapeake Energy. It was discovered that the proved reserves were much lower than originally believed. Seven Seas could no longer pay the interest and went into bankruptcy. Highland sued Ryder Scott and Chesapeake alleging fraud, negligent misrepresentation, and violations of the Texas Securities Act.

The court dismissed Highland’s claims for fraud and negligent misrepresentation. Highland failed to show evidence of either out-of-pocket damages or benefit-of-the-bargain damages, said the court.  There was no evidence of wrongdoing by Chesapeake, who purchased senior notes after Highland purchased its subordinated notes. The claim was that when buying the notes Chesapeake relied on the reserve reports which it knew were false and thus knew that the value of Highland’s interests would be destroyed by Chesapeake’s purchase. This was alleged as a conspiracy between Seven Seas and Chesapeake to decrease the value of Highland’s notes. For good reason (how about the absence of a motive?) the court didn’t buy that argument.

The court also dismissed the claim that Chesapeake aided and abetted Ryder Scott’s (alleged) securities fraud. To aid and abet, a person must have “general awareness” of its role in a securities violation, or render “substantial assistance”, or either intend to deceive the plaintiff or act with reckless disregard for the truth of the primary violator’s representations. Chesapeake testified that it had no knowledge that the reserve reports were false. Highland’s expert testified that Chesapeake should have known of the falsity, but “should have known” isn’t enough to constitute aiding and abetting, said the court.

A question remained whether the securities brokers (who weren’t parties to the litigation) were “sellers” under the TSA, so Ryder Scott could potentially be secondarily liable for aiding the brokers. There was also a fact question whether Ryder Scott’s estimates were material misrepresentations, despite strong cautionary language in the prospectus. The case was remanded to the trial court to determine those issues.  It appears that Highland will rely on the reckless disregard element to establish its case.