SEC drops probe of Carlyle, Goldman-backed Cobalt Energy; shareholder lawsuit proceeds

The SEC’s move could signal the end of a related Department of Justice inquiry and likely weakens the prospects for a shareholder lawsuit that alleges the oil and gas company and its private equity backers had obtained contracts for its Angolan wells—called “blocks”—by partnering with shell corporations known to be tied to Angolan politicians.

The suit also alleges that Cobalt misrepresented the value of those wells, according to a copy of the complaint. In addition to Cobalt, the suit names backers The Carlyle Group, First Reserve, Goldman Sachs, KERN Partners and Riverstone Holdings as complicit in the scheme. 

“The SEC’s decision does not have an effect on the case or Cobalt’s exposure. What our case is about is that Cobalt and other defendants misled the market about its Angolan business investments,” said David Stickney of Bernstein Litowitz Berger & Grossman, in an interview. Stickney’s law firm represents St. Lucie County Fire District Firefighters’ Pension Trust Fund and Fire and Police Retiree Healthcare Fund, San Antonio in the case.    

James Bounds, executive director of Fire and Police Retiree Healthcare Fund, San Antonio, said he was not aware the SEC had terminated its investigation. Asked if the fund would move forward with the lawsuit, he said he would have to discuss it with the fund’s attorneys. 

Despite the ongoing lawsuit and Department of Justice inquiry, Cobalt CEO Joseph Bryant gave an optimistic report to Wall Street analysts recently, saying that investigation had allowed the oil and gas company to develop a strong working relationship with regulators. 

“We brought the DOJ into the investigation early on to make sure that they could run a parallel investigation, if that was what they wanted,” Bryant said on a Feb. 23 earnings call. “We got the SEC out of the way. The DOJ is an independent agency. And it will run its process according to its measures, but I do think that we consider this issue largely behind us.” 

Indeed, “it is highly unlikely that if the SEC drops the case, the DOJ would move forward,” said Mike Koehler, an associate professor at Southern Illinois University School of Law who specializes in FCPA enforcement. Koehler observed that, as a civil authority, the SEC has a lower burden of proof than the Department of Justice, which is tasked with criminal enforcement. 

Cobalt Vice President of Government and Public Affairs Lynne Hackedorn did not respond to requests for comment. Department of Justice spokesman Peter Carr declined to comment. Carlyle, First Reserve, Goldman Sachs and Riverstone declined to comment. Jeff Van Steenbergen of KERN and St. Lucie fund officials did not respond to requests for comment.

Launching Cobalt

Oil and gas executives from BP, Mobil Corporation and Unocal Corporation joined with funds managed by Carlyle, Riverstone and Goldman Sachs to launch Cobalt in 2005. First Reserve invested $350 million in Cobalt in 2007. It’s not clear when KERN invested.

The company held an initial public offering in 2009. In 2010, a Cobalt filing disclosed that the company had become aware of connections between Angolan officials and Nazaki Oil and Gáz, a domestic oil and gas company that the Angolan government assigned to partner with Cobalt in its exploration of offshore wells.

The SEC launched an investigation into the company’s connection to Nazaki that culminated in an August 2014 Wells Notice, which is sent when the regulator anticipates taking an enforcement action against a company. The Wells Notice prompted Cobalt shares to fall 13 percent.

The shareholder lawsuit was filed in the U.S. Southern District of Texas Court in November. 

“There are going to be many other investors who are similarly situated. They suffered substantial losses and will seek recoveries from this lawsuit,” said Stickney, adding that the initial conference, at which the court will assign a lead plaintiff, is scheduled for March 2. “We’re at the beginnings of this litigation.” 

Associate Professor Koehler said he did not expect the suit to last past the dismissal phase. 

“In the vast majority of FCPA scrutiny, you have these plaintiff lawyers who come out of the woodwork. If you have a possible violation, or a disclosure that (you’re) under scrutiny, chances are you’ll have a lawsuit on your hands in 48 hours,” he said.  “Most of these shareholder lawsuits are opportunistic, parasitic attempts to capitalize off of this new era of FCPA enforcement or scrutiny.” 

Stickney could not be reached for further comment.