No scienter

Alaska Electrical Pension Fund v. Flotek Industries shows how demanding the federal securities laws are as to the issue of “scienter,” The plaintiffs alleged misrepresentations by the defendant about the viability of its software product called “FracMax,” which analyzes data about hydraulically-fractured oil and gas wells. These four alleged misrepresentations were not sufficient to produce the required “strong inference of scienter:

1. “Defendants’ repeated use of the term “conclusive” in describing FracMax’s effect, which Plaintiffs characterize as tantamount to assuring that FracMax’s data was irrefutable”;
2. “Defendants’ reference to FracMax data as “unadjusted” when, in fact, FracMax used an algorithm to adjust certain data”;
3. “Defendant Chisholm [the CEO]’s presentation at the September 11, 2015, conference of direct comparisons between several wells that used CnF [a technology measured by FracMax] versus several that did not, which Defendants concede relied on incorrect data for the non-CnF wells”; and
4. “Chisholm’s representation at this same conference that this data was ‘back check[ed] and validate[d],’ when Defendants later admitted that ‘Flotek had no internal controls in place to ensure the integrity of the FracMax database.'”

No. 17-20308 (Feb. 7, 2019).