Judge Holds That Shareholders’ Fraud Claims Against Natural Gas Company EQT Can Proceed

Shareholder Advocate Winter 2021

January 28, 2021

Securities fraud claims against EQT Corporation, one of the largest producers of natural gas in the United States, are proceeding to the discovery and class certification phases after a federal judge denied defendants’ motion to dismiss the case.

Cohen Milstein is co-lead counsel for the proposed classes of investors, representing co-lead plaintiffs Northeast Carpenters Annuity Fund and the Northeast Carpenters Pension Fund. Defendants include EQT, certain of its former officers and former and current directors, and the former CEO and a former director of Rice Energy, Inc.

EQT drills and completes natural gas wells through hydraulic fracturing, operating mainly in the Appalachian Basin. In June 2017, defendants announced that EQT was planning to acquire its competitor, Rice, in a deal valued at $6.7 billion. Defendants promised shareholders that EQT’s and Rice’s combined gas drilling acreage would enable the new EQT to drill 1,200 additional well locations with an average lateral length of 12,000 feet, generating synergies worth at least $2.5 billion and saving $100 million in the first year alone.

To win shareholder approval, defendants had to beat back claims by an investor, JANA Partners, who publicly argued that EQT’s claim of achievable synergies was inflated by more than $1 billion. EQT adamantly denied JANA’s criticisms, and in November 2017, the acquisition closed. Through most of 2018, EQT assured investors that the company had “hit the ground running” and was “well on track” to achieve “several hundred million dollars” more in synergies than it had projected.

Lead plaintiffs allege that defendants misled investors because their claimed numbers of achievable drilling locations and well length were in fact impossible to drill on the companies’ combined acreage. Lead plaintiffs also argue that defendants misrepresented their drilling abilities and their intent to incorporate Rice’s best practices. After the acquisition, EQT racked up operational problems and hundreds of millions of dollars in extra costs, which it concealed from investors for months. As the truth was revealed, EQT’s stock price fell, damaging investors.

On December 2, 2020, Judge Robert J. Colville of the U.S. District Court for the Western District of Pennsylvania upheld all nine claims brought by lead plaintiffs pursuant to the Securities Exchange Act of 1934 and the Securities Act of 1933. In doing so, Judge Colville found that the achievability of defendants’ purported synergies presented “a genuine issue of material, present fact,” as did EQT’s leaders’ post-acquisition statements touting the newly forged company’s successes. Judge Colville also rejected defendants’ argument that JANA’s assertions should have put investors on notice of the potential unreliability of their statements; to the contrary, Judge Colville held, defendants’ “consistent and strong” denials supported a finding that defendants at least spoke recklessly.

Lead plaintiffs’ claims are bolstered by revelations from some of Rice’s former owners, including Toby and Derek Rice, who launched a proxy fight for control of EQT in 2019. According to those former owners, EQT “consistently misled shareholders” regarding the acquisition, “did not seek and ha[d] not achieved the synergies and cost savings that were the purported rationale” for the acquisition and used “misleading math” in its accounting. The former Rice leaders gained control of EQT in June 2019, and Toby Rice became its CEO.

The case is In re EQT Securities Litigation, No. 2:19-cv-00754-RJC (W.D. Pa.).