Investors Question Reality of SoCal Water Pipeline

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     LOS ANGELES (CN) – A Southern California water-resources company lied to shareholders regarding the potential of proceeding with a proposed water pipeline, a federal class action claims.
     Lead plaintiff Nickolas Van Wingerden says in a complaint filed Friday in California’s Central District says officials for Los Angeles-based Cadiz knowingly disseminated false information regarding its proposed 43-mile water pipeline.
     The planned pipeline would run along a railroad right-of-way leased from the Arizona & California Railroad, Van Wingerden says.
     The problem, according to the complaint, is the U.S. Department of the Interior in 2011 said the railroad could “authorize other activities within” its right-of-way access only for “activities that derive from or further a ‘railroad purpose.'”
     “If the use of a right-of-way was not a ‘railroad purpose,’ then the use would require federal approval,” Van Wingerden says.
     In December 2011, Van Wingerden says Cadiz and the railroad claimed the lease would provide water to suppress railroad fires.
     The problem with that scenario is the Bureau of Land Management “did not believe that fire suppression was an actual need, because there had not been any trestle fires in the specific stretch,” Van Wingerden’s complaint states.
     Another problem is the “Federal Railroad Administration was unaware of any railroads with hydrants along the tracks” and the San Bernardino Fire Department said there are ample access roads that enable rapid response to any potential railroad fires, Van Wingerden says.
     The 2012 Consolidated Appropriations Act says the Secretary of the Interior must approve of the proposed pipeline use within the railroad’s right-of-way and denies any federal funding for the project, the complaint states.
     Despite the federal laws and departmental rulings, Van Wingerden says Cadiz “filed a materially false and misleading Form 10-K” for the end of 2013 that claims federal law and the Department of Interior affirms the railroad can approve access for the pipeline due its alleged fire suppression purpose for the railroad.
     The complaint cites the SEC filing as stating, “‘As a result, we do not believe federal right-of-way approval is required to implement the project; however, this may be subject to challenge.'”
     While the SEC filing indicates a positive outcome for the project, Van Wingerden says an April 21 report was published by SeekingAlpha.com that is titled “Cadiz: Strong Sell On Project Failure, Insider Enrichment, And Bankruptcy, Price Target $0.”
     That report claimed BLM documents indicate the project “already effectively failed” its federal review and “the project is impossible.”
     The report also claimed the Metropolitan Water District of Southern California “definitively said” they “‘already made the determination'” and “‘don’t see how'” the pipeline can be built.
     “If lawsuits ensue, instant bankruptcy is a real possibility” for Cadiz, the report stated.
     In response to the report, Cadiz on April 22 issued a release regarding the project that said federal approval is needed before proceeding.
     “The BLM must determine whether or not a railroad purpose is served by the pipeline project and has requested information from Cadiz, the [railroad] and Santa Margarita Water District over several years in order to make this determination,” Cadiz said in its statement.
     Cadiz also noted five railroad purposes served by the proposed project. They include an automated fire suppression system, access road, fiber optic cable and related information systems, a tourist-based steam engine, and power generation for lighting of siding, crossing and trans-loading operations.     
     Cadiz said the project “will arrange for the construction of a 43 mile-pipeline and appurtenant facilities that convey water and further, in part, railroad purposes.”
     Regarding federal approval, Cadiz said, “No determination has yet been made or issued and the matter is presently under submission with the BLM. They are expected to present a determination later this year.”
     Cadiz admitted to only having “informal conversations” with the Metropolitan Water District regarding the proposed pipeline and that no formal application has been submitted for review.
     On its website, Cadiz describes itself as a “renewable resources company” that was founded in 1983 after acquiring 11,000 acres of land in the Cadiz Valley in San Bernardino County. The company now owns more than 45,000 acres, including 35,000 in the Cadiz Valley, according to its website.
     The water pipeline project would capture and store water in the Cadiz Valley that otherwise would run to local dry lakes and evaporate, carrying the water to the Colorado River Aqueduct that provides water for Southern California, according to the Cadiz website.
     The class action accuses Cadiz and three executives of violations of the Exchange Act and seeks class certification, compensatory damages and legal costs.
     The proposed class is comprised of shareholders who bought Cadiz common shares from March 10, 2014, through April 21, 2015.
     Named as defendants are Cadiz, company president and CEO Scott S. Slater, chief financial officer Timothy J. Shaheen, and co-founder and chairman Keith Brackpool.
     Cadiz shares are traded publicly on NASDAQ under the “CDZI” symbol and had a closing price of $8.86 a share on April 29.
     Officials for Cadiz did not immediately respond to a request for comment.
     Plaintiff attorney Laurence M. Rosen was not available for comment.