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Class Claims Chemical Co. Lied About Data

HOUSTON (CN) - Flotek Industries directors sold $12.7 million in company stock before news broke that they inflated the share price with false data about its oil drilling fluids, a shareholder claims.

Houston-based Flotek makes chemical products that are used for mining, cleaning products, cosmetics and food and beverages, including a line of citrus fruit-based fluids that it touts as oil and gas well production boosters.

To prove how potent its drilling fluids are, Flotek launched a "FracMax" mobile application in May 2014, lead plaintiff Scott Chinitz says in a Jan. 19 federal class action lawsuit.

The app is supposed to use oil well production data before and after the

introduction of Flotek's fluids to show the benefits of using them, the complaint states.

The company gave investors concrete evidence during a Sept. 11, 2015, presentation, in which it showed the fluids' benefits for four Texas oil wells, using data from the Texas Railroad Commission, the agency that regulates oil and gas, according to the lawsuit.

But two months later, the Australian analyst firm Bronte Capital called out Flotek in a report that stated the data the company showed didn't match the Texas Railroad Commission's numbers, and a version of FracMax bought from Apple iTunes didn't work.

"On this news, shares of Flotek fell $3.50 per share or over 19 percent to close at $14.60 per share on Nov. 9, 2015," the complaint states.

Flotek immediately went into damage-control mode. The day after Bronte Capital issued its report, Flotek CEO John Chisholm admitted in a press release that his well production figures were off in the investor presentation.

"We appreciate the thorough analysis provided in the report and are using this critique as well as others to improve our FracMax application to ensure both the validity and reliability of the underlying data," Chisholm said in a statement.

But at the same time, Chisholm defended Flotek's fluids, stating they "improved productivity when compared to the neighboring wells that did not use" them.

Flotek further stated that its FracMax application is for the internal use of its employees only, and a version that drilling companies could use was forthcoming.

"A key code as well as other security requirements are necessary to obtain a working copy of the FracMax® application. This has been a consistent policy since FracMax® was introduced in 2014," the Nov. 10, 2015, press release states.

Chinitz claims in the lawsuit that Chisholm and other Flotek directors propped up the share price in 2014 and 2015 with public statements about the citrus drilling fluids and FracMax app, while privately they had their doubts.

They expressed these reservations in no uncertain terms by selling 1.2 million company shares for $12.7 million from May 2014 to October 2015, according to the complaint.

As Chinitz notes, it's illegal for company directors to sell stock based on non-public information.

Chinitz says the recipient of the biggest windfall was Flotek board member Carla Hardy, who sold 5.1 million shares for $7.6 million in the months before the Bronte Capital report, and Flotek's deference to it, dropped the share price by more than $9 to close at $9.04 on Nov. 10, 2015.

Hardy was the only director who made more than Chisholm. He sold 888,668 shares for $4.4 million before the news broke, according to the complaint.

The Bronte Capital report enraged Flotek investors, who have filed five federal class actions against the company's directors in Houston, including the latest from Chinitz. That's in addition to two class actions brought in Harris County Court this year.

Flotek's stock price was trading at $5.86 on Wednesday. The price has likely not yet bottomed out because the company announced Tuesday that the U.S. Securities and Exchange Commission has launched an investigation related to the FracMax software and the proprietary drilling fluids.

Chinitz seeks damages for breach of fiduciary duty and unjust enrichment. He also wants the directors who allegedly profited from insider trading to disgorge those proceeds.

He is represented by John McFarland with Joyce & McFarland in Houston.

A Flotek employee said the company will not make anyone available to answer questions about the lawsuit before brusquely hanging up the phone on Wednesday.

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