Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 1 of 22 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

Transcription

1 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 1 of 22 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION SEAN CADY, Individually and on Behalf of All Other Persons Similarly Situated VS. Plaintiff, KEY ENERGY SERVICES, INC., RICHARD J. ALARIO, and J. MARSHALL DODSON, Defendants. ) ) ) ) ) ) ) ) ) ) ) ) Civil Action No.: 4:14-cv-2368 JURY TRIAL DEMANDED CLASS ACTION COMPLAINT Plaintiff Sean Cady ( Plaintiff ), individually and on behalf of all other persons similarly situated, by his undersigned attorneys, for his complaint against defendants, alleges the following based upon personal knowledge as to himself and his own acts, and information and belief as to all other matters, based upon, inter alia, the investigation conducted by and through his attorneys, which included, among other things, a review of the defendants public documents, conference calls and announcements made by defendants, United States Securities and Exchange Commission ( SEC ) filings, wire and press releases published by and regarding Key Energy Services, Inc. ( Key Energy or the Company ), analysts reports and advisories about the Company, and information readily obtainable on the Internet. Plaintiff believes that substantial evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. 1

2 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 2 of 22 NATURE OF THE ACTION 1. This is a federal securities class action on behalf of a class consisting of all persons other than defendants who purchased Key Energy securities between July 25, 2013 and July 17, 2014, inclusive (the Class Period ), seeking to recover damages caused by defendants violations of the federal securities laws and to pursue remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the Exchange Act ) and Rule 10b-5 promulgated thereunder against the Company and certain of its top officials. 2. Key Energy s operations include two wholly subsidiaries, SCS Corporation and HYD Resources, which are focused on oil and gas exploration. 3. On January 6, 2014, after the market closed, Key Energy revealed that Mexico State-owned oil giant Petroleos Mexicanos ( PEMEX ), one of Key Energy s largest customers, was conducting an audit of the Company s aggregate billings of $372 million under its contracts with PEMEX. The Company announced that as a result, it expected to take a charge of $2 million to $3 million in the fourth quarter of This adverse announcement caused Key Energy s stock price to decline $0.28/share, or nearly 4%, on January 7, On May 6, 2014, Key Energy announced in its Form 10-Q filed with the SEC that the Company was being investigated for possible violations of the U.S. Foreign Corrupt Practices Act ( FCPA ) involving its operations in Russia. 6. This adverse news caused Key Energy stock to decline $0.52/share, or a two-day decline of nearly 6%, on May 8, On July 17, 2014, after the market closed, Key Energy revealed that it expected to report a second quarter loss in the range of $0.35 to $0.38 per share. The Company also 2

3 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 3 of 22 announced that it planned to record a $30 million to $35 million pre-tax charge for goodwill and other assets impairments related to its operations in Russia. The Company also disclosed that pre-tax expenses of $5 million were incurred in connection with the FCPA investigations. 8. This adverse news caused Key Energy shares to decline $1.34/share, or over 16%, to close at $7.03 per share on July 18, Throughout the Class Period, Defendants made false and/or misleading statements and/or failed to disclose: (1) that the Company s production for PEMEX was in decline; (2) that the Company engaged in improper conduct related to its operations in Russia; and (3) that the Company s business practices in Russia were in violation of the FCPA. JURISDICTION AND VENUE 10. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Exchange Act (15 U.S.C. 78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder (17 C.F.R b-5). 11. This Court has jurisdiction over the subject matter of this action pursuant to 27 of the Exchange Act (15 U.S.C. 78aa) and 28 U.S.C Venue is proper in this District pursuant to 27 of the Exchange Act, 15 U.S.C. 78aa and 28 U.S.C. 1391(b), as Key Energy is headquartered in this District. 13. In connection with the acts, conduct and other wrongs alleged in this Complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including but not limited to, the United States mail, interstate telephone communications and the facilities of the national securities exchange. 3

4 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 4 of 22 PARTIES 14. Plaintiff, as set forth in the attached certification, purchased Key Energy securities at artificially inflated prices during the Class Period and was damaged upon the revelation of the alleged corrective disclosures. 15. Defendant Key Energy, a Maryland corporation, is headquartered at 1301 McKinney Street, Suite 1800, Houston, Texas Defendant Richard J. Alario ( Alario ) was and is the Company s President and Chief Executive Officer. 17. Defendant J. Marshall Dodson ( Dodson ) was and is the Company s Chief Financial Officer. Defendants. 18. Alario and Dodson are sometimes referred to herein as the Individual SUBSTANTIVE ALLEGATIONS 19. The Class Period begins on July 25, 2013 when the Company issued a press release entitled, Key Energy Services Generated Second Quarter 2013 Normalized Earnings of $0.01 Per Share. The announcement states in relevant part: GAAP Earnings Were a Loss of $0.03 Per Share Key Energy Services, Inc. (NYSE: KEG) generated second quarter 2013 consolidated revenues of $411.4 million and normalized pre-tax income from continuing operations of $2.2 million, or $0.01 per share. Normalized pre-tax income from continuing operations excludes $8.3 million, or $0.04 per share, of severance and restructuring costs. On a GAAP Basis, the second quarter 2013 net loss from continuing operations was $4.1 million, or $0.03 per share. Both GAAP and normalized results include $2.3 million of pre-tax equipment mobilization costs associated with international operations. 4

5 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 5 of 22 First quarter 2013 consolidated revenues were $428.4 million with normalized pre-tax income from continuing operations of $1.4 million, or $0.01 per share, which excludes a $2.2 million pre-tax charge associated with an executive retirement. On a GAAP basis, first quarter 2013 net loss from continuing operations was $274,000 or $0.00 per share. Overview of Results Commenting on the results, Key s Chairman, President, and Chief Executive Officer, Dick Alario, stated, We are pleased that, on a normalized basis, Key s U.S. segment delivered 50% operated income growth on a sequential revenue increase of 4.5%. This strong U.S. performance was driven by operation and cost efficiencies and effective execution in the restructuring of Fluid Management Services, which offset the impact of a severe activity decline in the North Region of Mexico within our International Segment. U.S. Segment Second quarter 2013 U.S. revenues were $361.7 million, up 4.5% compared to $346.1 million in the first quarter Second quarter U.S. normalized operating income was $57.5 million, or 15.9% of revenues, compared to $38.3 million, or 11.1% of revenues, in the first quarter. Second quarter U.S. normalized operating income excludes $2.4 million of severance and restructuring costs primarily associated with the Fluid Management Services restructuring. U.S. results benefited from improved operational efficiencies in Rig Services and Coiled Tubing Services. Fluids Management Services generated a slight profit inclusive of the restructuring expenses and despite flat market activity and strong competitive pressures. International Segment Second quarter 2013 international revenues were $49.7 million, down 39.7% compared to $82.4 million in the first quarter Second quarter international normalized operating loss was $5.8 million, or -11.8% of revenues. Second quarter international normalized operating loss excludes $5.2 million of expenses primarily associated with severance in Mexico but includes $2.1 million of expenses associated with rig mobilizations. 5

6 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 6 of 22 Second Quarter financial results were negatively impacted by the worse than anticipated activity decline in the North Region of Mexico. Key s active Mexico rig count averaged 16 rigs operating during the second quarter compared to an average of 40 rigs operating in the first quarter. The 60% quarter-over-quarter revenue decline in Mexico drove a normalized incremental operating income margin of 54%, due to operating inefficiencies associated with the sharp activity decline. Outlook Commenting on Key s outlook, Alario stated, In the U.S., we expect third quarter market activity levels roughly flat with the second quarter, followed by a typical season activity decline in the fourth quarter. As such, we anticipate Key s third quarter U.S. revenues and margin will be similar to the second quarter s results. Internationally, we expect approximately breakeven operated income in the third quarter, inclusive of ongoing equipment mobilization expense, as we continue to redeploy idle rigs from the North Region of Mexico to higher demand markets. 20. On August 2, 2013, Key Energy filed with the SEC its second quarter 2013 financial results on Form 10-Q with the SEC, which repeated the financial results in the Company s July 25, 2013 press release, above. The Q Q was and certified by defendant Dodson. The Q Q was accompanied by a Sarbanes-Oxley Act of 2002 ( SOX ) certifications, signed by Defendants Alario and Dodson, who certified: 1. I have reviewed this Quarterly Report on Form 10-Q of Key Energy Services, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 6

7 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 7 of The registrant s other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any chance in the registrant s internal control over financial reporting that occurred during the registrant s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant s internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant s internal control over financial reporting 7

8 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 8 of On October 31, 2013, the Company issued a press release entitled, Key Energy Services reports Third Quarter 2013 Earnings. The announcement states in relevant part: Key Energy Services, Inc. (NYSE: KEG) today reported third quarter 2013 consolidated revenues of $389.7 million and pre-tax loss from continuing operations of $2.0 million. The Company incurred a $0.03 per share loss for the second quarter, which includes $0.02 of loss due to effective tax rate impacts. Second quarter 2013 consolidated revenues were $411.4 million with normalized pre-tax income from continuing operations of $2.2 million, or $0.01 per share, which excludes $8.3 million of severance and restructuring costs. On a GAAP basis, second quarter 2013 net loss from continuing operations attributable to Key was $4.1 million, or $0.03 per share. Overview of Results Commenting on the results, Key s Chairman, President, and Chief Executive Officer, Dick Alario, stated, As expected, U.S. market activity remained flat sequentially and our U.S. segment activity was adversely affected by chances in certain customer spending programs. On a sequential basis, we maintained our U.S. segment margin as we benefitted from earlier efforts to reduce our overall cost structure to align it with current market activity. Outside of the U.S., our International segment revenues and margins continued to be adversely affected by our principal customer s budgetary constraints in the North Region of Mexico. U.S. Segment Third quarter 2013 U.S. revenues were $345.1 million, down 4.6% compared to $361.7 million in the second quarter Third quarter U.S. operating income was $52.0 million, or 15.1% of revenues, compared to $55.1 million, or 15.2% of revenues, in the second quarter. Key s Coiled Tubing Services and Fishing and Rental Services business, primarily in the frack stack and flow back operations, drove the sequential decline in revenues, down 10.9% and 9.7% respectively, as transitions in customer spending programs in certain markets yielded activity interruptions that caused asset redeployment delays. 22. On November 11, 2013, Key Energy filed its third quarter 10-Q with the SEC which repeated the financial results contained in the October 31, 2013 press release. The 10-Q was signed and certified by defendant Dodson and accompanied by signed SOX certifications of defendants Alario and Dodson. 8

9 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 9 of On January 6, 2013, the Company issued a press release entitled, Key Energy Services Provides Fourth Quarter 2013 Update. The announcement states in relevant part: Key Energy Services, Inc. (NYSE: KEG) today provided the following updates for the fourth quarter 2013: Key averaged 32 operating rigs in its International segment during the fourth quarter as compared to 35 average operating rigs in the third quarter. During the fourth quarter, the Company added 10 operating rigs associated with the 14 rigs which the Company had previously disclosed had new contracts or were awarded work. The Company expects two these rigs to be idled by mid-first quarter Due to activity reductions almost entirely related to PEMEX, the Company exited the fourth quarter with 30 operating rigs in its International segment. As a result of lower than expected activity in the North Region of Mexico and uncertainty around the timing of increased workover activity, the Company took steps in the fourth quarter to further reduce its workforce and incurred severance costs of approximately $2 million. PEMEX is conducting an audit of the Company s aggregate billing of $372 million under its contracts with PEMEX. As a result, the Company expects to take a charge of between $2 million and $3 million in the fourth quarter The Company s total debt at December 31, 2013 was approximately $770 million as compared to $832.7 million as of September 30, Commenting on the update, Key s Chairmen, President, and Chief Executive Officer, Dick Alario, stated, Our activity levels with PEMEX in the fourth quarter were materially lower than our prior forecast, which was based on indications we received through discussions with PEMEX. We believe that activity will improve in the North Region of Mexico once the National Hydrocarbons Commission approves the assets which PEMEX will continue to manage. This approval process, commonly referred to as Round Zero, is a requirement of the recently ratified energy reform in Mexico. Alario continued, Today we have 41 rigs in Mexico, five of which are currently operating. Our plan is to redeploy 10 to 12 rigs to the U.S. in the first half of Commenting further, Alario stated, In the U.S., fourth quarter activity was strong enough to overcome more severe weather than anticipated in our prior guidance, and we expect our fourth quarter U.S. results to be within our previously guided range. 9

10 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 10 of On this news, shares of Key Energy declined $0.28/share, or nearly 4%, to close at $7.55/share on January 7, On February 13, 2014, the Company issued a press release entitled, Key Energy Services Reports Fourth Quarter and Full-Year 2013 Earnings. The announcement states in relevant part: Key Energy Services, Inc. (NYSE: KEG) reported fourth quarter 2013 consolidated revenues of $362.2 million and a pre-tax loss from continuing operations of $15.4 million, or $0.08 per share. These results include a $0.02 loss due to severance, primarily in Mexico. Excluding the severance charges, the Company recorded a $0.06 per share loss for the fourth quarter. Third quarter 2013 consolidated revenues were $389.7 million with a loss from continuing operations of $2.0 million, or $0.03 per share, which included $0.02 of loss due to an effective tax rate impact U.S. Segment Fourth quarter 2013 U.S. revenues were $324.1 million, down 6.1% compared to $345.1 million in the third quarter Fourth quarter operating income was $47.0 million, or 14.5% of revenue, compared to $52.0 million, or 15.1% of revenue, in the third quarter. Operating income margins were impacted by seasonal effects and multiple severe weather events. Despite these factors, Rig Services saw a revenue decline of only 3.6% sequentially as a growing customer base mitigated the negative impacts to revenue. Coiled Tubing Services and Fishing and Rental Services were adversely impacted by severe weather and activity reductions by certain customers during the back half of the quarter. International Segment Fourth quarter 2013 international revenues were $38.1 million, down 14.5% compared to third quarter 2013 revenues of $44.6 million. Fourth quarter operating loss was $20.2 million, or -53.1% of revenues, compared to third quarter operating loss of $7.3 million, or -16.4% of revenues. Operating income margins were adversely impacted by $2.6 million of severance primarily associated with the downsizing of our Mexico operations and by a $3.2 million pre-tax charge associated with the previously disclosed audit by PEMEX. Overview and Outlook Key s Chairman, President and Chief Executive Officer, Dick Alario, stated, We are encouraged by the strength that our U.S. business showed during the fourth quarter and by the traction we have gained in broadening our U.S. customer base. 10

11 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 11 of 22 In recent weeks, we have seen positive demand signals from many of our customers and have seen the pace of inquiries for our services increase. We expect U.S. revenues in the first quarter to increase 3% to 5% over fourth quarter 2013 levels. However, we expect our U.S. margins to be pressured primarily by payroll taxes and costs associated with moving rigs from Mexico to the U.S. Outside of the U.S., we expect our first quarter revenue to decline 10% to 15% sequentially assuming Mexico activity remains at current levels. Additionally, we expect to incur severance expense of $1 to $2 million as we continue to align our cost structure with current activity. Excluding this severance expense, we expect our International Segment to be approximately at cash flow breakeven by the end of the first quarter. Our capital expenditure plan for 2014 is $198 million for equipment maintenance needs, including ongoing upgrades to our Rig Services fleet. Alario concluded, Based on announced U.S. customer plans for this year, we now expect a higher level of activity in our domestic businesses for 2014 with a more than seasonal uplift in activity as we exit the first quarter. 26. On February 25, 2014, Key Energy filed its Annual Report with the SEC on Form 10-K for the 2013 fiscal year, which repeated the financial results from the February 14, 2014 press release. The 10-K was signed and certified by defendants Alario and Dodson. Accompanying the 10-K were signed SOX certifications of defendants Alario and Dodson. 27. On April 30, 2014, the Company issued a press release entitled, Key Energy Services Reports First Quarter 2014 Earnings. The announcement states in relevant part: Key Energy Services, Inc. (NYSE: KEG) reported first quarter 2014 consolidated revenues of $356.1 million and a pre-tax loss of $19.6 million, or $0.08 per share. These results include a $0.01 loss due to severance, primarily in Mexico, and approximately a $0.01 loss due to severe weather disruptions. Excluding severance, the Company recorded a $0.07 per share loss for the first quarter. Fourth quarter 2013 consolidated revenues were $362.2 million with a loss of $15.4 million, or $0.08 per share, which included $0.02 of loss due to severance, primarily in Mexico. U.S. Segment First quarter 2014 U.S. revenues were $324.0 million, flat compared to $324.1 million in the fourth quarter First quarter operating income was $35.7 million, or 11.0% of revenue, compared to $47.0 million, or 14.5% of revenue, in 11

12 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 12 of 22 the fourth quarter. Operating income margins were impacted by payroll taxes, costs associated with moving rigs from Mexico to the U.S. and multiple severe weather events. Completion-driven services, such as Coiled Tubing Services, large completion rigs and pipe rental, improved sequentially. Severe weather and changes in regional revenue mix impacted the Company s production-driven services, specifically Rig Services and Fluid Management Services. International Segment First quarter 2014 International revenues were $32.1 million, down 15.7% compared to fourth quarter 2013 revenues of $38.1 million. First quarter operating loss was $10.5 million, or -32.7% of revenues, compared to fourth quarter operating loss of $20.2 million, or -53.1% of revenues. Operating income margins were adversely impacted by $1.3 million of severance primarily associated with the downsizing of our Mexico operations. Overview and Outlook Key s Chairman, President and Chief Executive Officer, Dick Alario, stated, We are encouraged by the pace of U.S. well completion activity that we ve seen since exiting the harsh winter season and by demand for our services in the Permian Basin, now predominantly driven by horizontal-directed activity. Further, we are more optimistic about the long-term prospects for well intervention and recompletion activity for the aging horizontal oil shale well inventory. Given the pace of recent customer inquiries and tender activity, we believe customer spending will ramp up as we exit the second quarter and enter the second half of the year. We expect U.S. revenues in the second quarter to increase 4% 6% over first quarter levels. Further, we expect U.S. operating income margins to recover 250 to 350 basis points from the burden associated with seasonal impacts in the first quarter. In our International segment, we expect second quarter revenue to decline approximately 10% sequentially as certain contracts conclude. With our current cost structure and the progression of activity in other markets, we believe that our financial results have effectively bottomed and should allow operating margins to improve approximately 2,000 basis points in the second quarter. 28. On May 6, 2014, Key Energy filed first quarter Q with the SEC. The 10- Q was signed and certified by defendant Dodson and repeated the Company s financial results set forth in the Company s April 30, 2014 press release. Accompanying the 10-Q were SOX certifications signed by defendants Alario and Dodson. The 10-K also revealed the following: 12

13 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 13 of 22 The U.S. Securities and Exchange Commission has advised us that it is investigating possible violations of the U.S. Foreign Corrupt Practices Act involving business activities of Key s operations in Russia. We take any such allegations very seriously and are conducting an investigation into the allegations. We are fully cooperating with and sharing the results of our investigation with the Commission. While the outcome of our investigation is currently not determinable, we do not expect that it will have a material adverse effect on our consolidated financial position, results of operations, or cash flows. 29. The statements identified above were materially false and/or misleading when made because defendants failed to disclose or indicate the following: (1) that the Company s production for PEMEX was in decline; (2) that the Company engaged in improper conduct related to its operations in Russia; (3) that the Company s business practices in Russia were in violation of the FCPA; and (4) that, as a result of the foregoing, the Company s statements were materially false and misleading and/or lacked a reasonable basis at all relevant times. THE TRUTH BEGINS TO EMERGE 30. On July 17, 2014, after the market closed, the Company issued a press release entitled, Key Energy Services Provides Second Quarter 2014 Update and Earnings Release and Conference Call Information. The announcement states in relevant part: Key Energy Services, Inc. (NYSE: KEG) today provided the following updates for the second quarter 2014: Key expects to report a second quarter 2014 loss in the range of $0.14 $0.15, excluding goodwill and asset impairments and utilizing an effective tax rate of approximately 29%. Additionally: Key expects its consolidated revenue to be down approximately 2% compared to the first quarter 2014; additionally, the Company expects its U.S. segment revenue to be approximately flat on a sequential basis as its production-driven businesses outside of California did not see sufficient activity increases to offset lower activity in California. The Company expects to record a $30 - $35 million pre-tax charge for goodwill and other assets impairments related to its operations in Russia. 13

14 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 14 of 22 Pre-tax expenses of approximately $5 million were incurred in connection with the previously disclosed Foreign Corrupt Practices Act investigations. Redeployment and make-ready pre-tax costs of approximately $2 million were incurred in association with the previously disclosed movement of rigs from Mexico to the U.S. Pre-tax severance costs of approximately $1 million were incurred in association with headcount reductions, primarily in Mexico. Capital expenditures were $41 million during the second quarter 2014; total debt at June 30, 2014 was $719 million and the Company paid $45 million towards its $550 million senior secured credit facility leaving $461 million undrawn. Including an estimated goodwill and other assets impairments pre-tax charge of $30 - $35 million, Key expects to report a second quarter 2014 loss in the range of $ $ This adverse information caused Key Energy sock to decline $1.34/share, or nearly 16%, to close at $7.03 per share on July 18, PLAINTIFF S CLASS ACTION ALLEGATIONS 32. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or otherwise acquired Key Energy securities during the Class Period (the Class ); and were damaged thereby. Excluded from the Class are defendants herein, the officers and directors of the Company, at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest. 33. The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, Key Energy securities were actively traded on the NYSE. While the exact number of Class members is unknown to Plaintiff at this time and can be ascertained only through appropriate discovery, Plaintiff believes that there are hundreds or 14

15 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 15 of 22 thousands of members in the proposed Class. Record owners and other members of the Class may be identified from records maintained by Key Energy or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions. 34. Plaintiff s claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by defendants wrongful conduct in violation of federal law that is complained of herein. 35. Plaintiff will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class and securities litigation. Plaintiff has no interests antagonistic to or in conflict with those of the Class. 36. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are: whether the federal securities laws were violated by defendants acts as alleged herein; whether the statements made by defendants to the investing public during the Class Period misrepresented material facts about the business, operations and management of Key Energy; whether the Individual Defendants caused Key Energy to issue false and misleading financial statements during the Class Period; whether defendants acted knowingly or recklessly in issuing false and misleading financial statements; whether the prices of Key Energy securities during the Class Period were artificially inflated because of the defendants conduct complained of herein; and 15

16 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 16 of 22 whether the members of the Class have sustained damages and, if so, what is the proper measure of damages. 37. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action. 38. Plaintiff will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine in that: defendants made public misrepresentations or failed to disclose material facts during the Class Period; the omissions and misrepresentations were material; Key Energy securities are traded in efficient markets; the Company s shares were liquid and traded with moderate to heavy volume during the Class Period; the Company traded on the NYSE, and was covered by multiple analysts; the misrepresentations and omissions alleged would tend to induce a reasonable investor to misjudge the value of the Company s securities; and Plaintiff and members of the Class purchased and/or sold Key Energy securities between the time the defendants failed to disclose or misrepresented material facts and the time the true facts were disclosed, without knowledge of the omitted or misrepresented facts. 39. Based upon the foregoing, Plaintiff and the members of the Class are entitled to a presumption of reliance upon the integrity of the market. 16

17 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 17 of 22 COUNT I (Against All Defendants For Violations of Section 10(b) And Rule 10b-5 Promulgated Thereunder) 40. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein. 41. This Count is asserted against defendants and is based upon Section 10(b) of the Exchange Act, 15 U.S.C. 78j(b), and Rule 10b-5 promulgated thereunder by the SEC. 42. During the Class Period, defendants engaged in a plan, scheme, conspiracy and course of conduct, pursuant to which they knowingly or recklessly engaged in acts, transactions, practices and courses of business which operated as a fraud and deceit upon Plaintiff and the other members of the Class; made various untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and employed devices, schemes and artifices to defraud in connection with the purchase and sale of securities. Such a scheme was intended to, and, throughout the Class Period, did: (i) deceive the investing public, including Plaintiff and other Class members, as alleged herein; (ii) artificially inflate and maintain the market price of Key Energy securities; and (iii) cause Plaintiff and other members of the Class to purchase Key Energy securities and options at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein. 43. Pursuant to the above plan, scheme, conspiracy and course of conduct, each of the defendants participated directly or indirectly in the preparation and/or issuance of the quarterly and annual reports, SEC filings, press releases and other statements and documents described above, including statements made to securities analysts and the media that were 17

18 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 18 of 22 designed to influence the market for Key Energy securities. Such reports, filings, releases and statements were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about Key Energy s finances and business prospects. 44. By virtue of their positions at Key Energy, defendants had actual knowledge of the materially false and misleading statements and material omissions alleged herein and intended thereby to deceive Plaintiff and the other members of the Class, or, in the alternative, defendants acted with reckless disregard for the truth in that they failed or refused to ascertain and disclose such facts as would reveal the materially false and misleading nature of the statements made, although such facts were readily available to defendants. Said acts and omissions of defendants were committed willfully or with reckless disregard for the truth. In addition, each defendant knew or recklessly disregarded that material facts were being misrepresented or omitted as described above. 45. Information showing that defendants acted knowingly or with reckless disregard for the truth is peculiarly within defendants knowledge and control. As the senior managers and/or directors of Key Energy, the Individual Defendants had knowledge of the details of Key Energy internal affairs. 46. The Individual Defendants are liable both directly and indirectly for the wrongs complained of herein. Because of their positions of control and authority, the Individual Defendants were able to and did, directly or indirectly, control the content of the statements of Key Energy. As officers and/or directors of a publicly-held company, the Individual Defendants had a duty to disseminate timely, accurate, and truthful information with respect to Key Energy s businesses, operations, future financial condition and future prospects. As a result of the dissemination of the aforementioned false and misleading reports, releases and public statements, 18

19 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 19 of 22 the market price of Key Energy securities was artificially inflated throughout the Class Period. In ignorance of the adverse facts concerning Key Energy s business and financial condition which were concealed by defendants, Plaintiff and the other members of the Class purchased Key Energy securities at artificially inflated prices and relied upon the price of the securities, the integrity of the market for the securities and/or upon statements disseminated by defendants, and were damaged thereby. 47. During the Class Period, Key Energy securities were traded on an active and efficient market. Plaintiff and the other members of the Class, relying on the materially false and misleading statements described herein, which the defendants made, issued or caused to be disseminated, or relying upon the integrity of the market, purchased shares of Key Energy securities at prices artificially inflated by defendants wrongful conduct. Had Plaintiff and the other members of the Class known the truth, they would not have purchased said securities, or would not have purchased them at the inflated prices that were paid. At the time of the purchases by Plaintiff and the Class, the true value of Key Energy securities was substantially lower than the prices paid by Plaintiff and the other members of the Class. The market price of Key Energy securities declined sharply upon public disclosure of the facts alleged herein to the injury of Plaintiff and Class members. 48. By reason of the conduct alleged herein, defendants knowingly or recklessly, directly or indirectly, violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. 49. As a direct and proximate result of defendants wrongful conduct, Plaintiff and the other members of the Class suffered damages in connection with their respective purchases 19

20 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 20 of 22 and sales of the Company s securities during the Class Period, upon the disclosure that the Company had been disseminating misrepresented financial statements to the investing public. COUNT II (Violations of Section 20(a) of the Exchange Act Against The Individual Defendants) 50. Plaintiff repeats and realleges each and every allegation contained in the foregoing paragraphs as if fully set forth herein. 51. During the Class Period, the Individual Defendants participated in the operation and management of Key Energy, and conducted and participated, directly and indirectly, in the conduct of Key Energy s business affairs. Because of their senior positions, they knew the adverse non-public information about Key Energy s violations of federal law. 52. As officers and/or directors of a publicly owned company, the Individual Defendants had a duty to disseminate accurate and truthful information with respect to Key Energy s business practices, and to correct promptly any public statements issued by Key Energy which had become materially false or misleading. 53. Because of their positions of control and authority as senior officers, the Individual Defendants were able to, and did, control the contents of the various reports, press releases and public filings which Key Energy disseminated in the marketplace during the Class Period concerning Key Energy s operations. Throughout the Class Period, the Individual Defendants exercised their power and authority to cause Key Energy to engage in the wrongful acts complained of herein. The Individual Defendants therefore, were controlling persons of Key Energy within the meaning of Section 20(a) of the Exchange Act. In this capacity, they participated in the unlawful conduct alleged which artificially inflated the market price of Key Energy securities. 20

21 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 21 of Each of the Individual Defendants, therefore, acted as a controlling person of Key Energy. By reason of their senior management positions and/or being directors of Key Energy, each of the Individual Defendants had the power to direct the actions of, and exercised the same to cause, Key Energy to engage in the unlawful acts and conduct complained of herein. Each of the Individual Defendants exercised control over the general operations of Key Energy and possessed the power to control the specific activities which comprise the primary violations about which Plaintiff and the other members of the Class complain. 55. By reason of the above conduct, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act for the violations committed by Key Energy. PRAYER FOR RELIEF WHEREFORE, Plaintiff demands judgment against defendants as follows: A. Determining that the instant action may be maintained as a class action under Rule 23 of the Federal Rules of Civil Procedure, and certifying Plaintiff as the Class representative; B. Requiring defendants to pay damages sustained by Plaintiff and the Class by reason of the acts and transactions alleged herein; C. Awarding Plaintiff and the other members of the Class prejudgment and post judgment interest, as well as their reasonable attorneys fees, expert fees and other costs; and D. Awarding such other and further relief as this Court may deem just and proper. 21

22 Case 4:14-cv Document 1 Filed in TXSD on 08/15/14 Page 22 of 22 DEMAND FOR TRIAL BY JURY Plaintiff hereby demands a trial by jury. Dated: August 15, 2014 PAYNE MITCHELL LAW GROUP /s/ R. Dean Gresham R. Dean Gresham, Esq. Texas Bar No S.D.T.X. No Turtle Creek Blvd., Suite 1400 Dallas, TX Tel: (214) Fax: (214) dean@paynemithcell.com And THE ROSEN LAW FIRM, P.A. Phillip Kim, Esq. (not admitted) Laurence M. Rosen, Esq. (not admitted) 275 Madison Avenue, 34 th Floor New York, New York Telephone: (212) Fax: (212) pkim@rosenlegal.com lrosen@rosenlegal.com Attorneys for Plaintiff 22

23 Case 4:14-cv Document 1-1 Filed in TXSD on 08/15/14 Page 1 of 2 Certification and Authorization of Named Plaintiff Pursuant to Federal Securities Laws The individual or institution listed below (the "Plaintiff") authorizes and, upon execution of the accompanying retainer agreement by The Rosen Law Firm P.A., retains The Rosen Law Firm P.A. to file an action under the federal securities laws to recover damages and to seek other relief against Key Energy Services, Inc.. The Rosen Law Firm P.A. will prosecute the action on a contingent fee basis and will advance all costs and expenses. The Key Energy Services, Inc.. Retention Agreement provided to the Plaintiff is incorporated by reference, upon execution by The Rosen Law Firm P.A. First name: Middle initial: Last name: Address: City: State: Zip: Country: Facsimile: Phone: sean f cady redacted Plaintiff certifies that: 1. Plaintiff has reviewed the complaint and authorized its filing. 2. Plaintiff did not acquire the security that is the subject of this action at the direction of plaintiff's counsel or in order to participate in this private action or any other litigation under the federal securities laws. 3. Plaintiff is willing to serve as a representative party on behalf of a class, including providing testimony at deposition and trial, if necessary. 4. Plaintiff represents and warrants that he/she/it is fully authorized to enter into and execute this certification. 5. Plaintiff will not accept any payment for serving as a representative party on behalf of the class beyond the Plaintiff's pro rata share of any recovery, except such reasonable costs and expenses (including lost wages) directly relating to the representation of the class as ordered or approved by the court. 6. Plaintiff has made no transaction(s) during the Class Period in the debt or equity securities that are the subject of this action except those set forth below: Acquisitions: Type of Security Buy Date # of Shares Price per Share Common Stock 05/14/ Common StockBuy Date # of Shares Price per Share Sales: Type of Security Sale Date # of Shares Price per Share Common StockSell Date # of Shares Price per Share

24 Case 4:14-cv Document 1-1 Filed in TXSD on 08/15/14 Page 2 of 2 Certification for sean cady (cont.) 7. I have not served as a representative party on behalf of a class under the federal security laws during the last three years, except if detailed below. [ ] I declare under penalty of perjury, under the laws of the United States, that the information entered is accurate: By clicking on the button below, I intend to sign and execute this agreement and retain the Rosen Law Firm, P.A. to proceed on Plaintiff's behalf, on a contingent fee basis. YES YES Signed pursuant to California Civil Code Section , et seq. - and the Uniform Electronic Transactions Act as adopted by the various states and territories of the United States. Date of signing: 07/29/2014

25 Case 4:14-cv Document 1-2 Filed in TXSD on 08/15/14 Page 1 of 2

26 Case 4:14-cv Document 1-2 Filed in TXSD on 08/15/14 Page 2 of 2