In the wake of the disastrous April 2010 Deepwater
Horizon oil spill, BP was hit with a wave of litigation from plaintiffs
asserting claims of personal injury, wrongful death and property damage. The
claimants also included BP shareholders raising allegations that they had been
misled regarding BP safety efforts and processes. In a 129-page February 13,
2012 opinion (here),
Southern District of Texas Judge Keith Ellison, while
granting the defendants' motion to dismiss certain of plaintiffs' allegations,
denied defendants' motion to dismiss many of the allegations of BP investors
who had purchased BP American Depositary Shares (ADS) on the New York Stock
Exchange.
However Judge Ellison granted the defendants' motion to
dismiss all of the claims - including claims asserted under New York state law
and English common law - of U.S.-domiciled investors who purchased their BP shares
on the London Stock Exchange.
Finally, in a separate 82-page order also dated February
13, 2012 (here),
Judge Ellison granted without prejudice defendants' motion to dismiss the
claims on a separate group of Plaintiffs (the "Ludlow plaintiffs").
Background
The Deepwater Horizon oil spill lasted for eighty seven
days and cost BP somewhere between $20 billion and $40 billion. Over the course
of the disaster, over four million barrels of oil spilled in the Gulf at a rate
of about 60,000 per day. From the date of the initial explosion to the final
date of the class period in the securities class action lawsuit, BP's market
capitalization fell over $91 billion.
As detailed here, investors filed
the first of their securities class action lawsuits against BP, related
entities and certain of its directors and officers in May 2010. The various
suits were transferred to the Southern District of Texas. The cases were
ultimately consolidated, and the New York Controller and the Ohio Attorney
General were appointed as lead plaintiffs. Judge Ellison also appointed a separate
subclass consisting of the Ludlow plaintiffs. The New York and Ohio plaintiffs
alleged that BP had made a series of fraudulent misstatements about its safety
efforts and procedures beginning in 2007. The Ludlow plaintiffs' allegations
related to specific statements about the company's Gulf operations in the
thirteen months prior to the Deepwater Horizon explosion.
The New York and Ohio plaintiffs named as defendants BP,
certain BP-related entities and ten former directors and officers. The Ludlow
plaintiffs alleged claims against certain BP entities and nine individual
defendants. The defendants moved to dismiss.
The Court's February 13, 2012 Rulings
In his February 13 opinions, Judge Ellison agreed with
the defendants that certain of the New York and Ohio plaintiffs' allegations
were legally insufficient, and that the plaintiffs' allegations as to certain
of the individual defendants were also insufficient. However, he also held, at
least with respect to the claims of ADS investors, that other allegations were
sufficient and that adequate claims had been asserted against the BP entities,
former BP CEO Tony Hayward, and against Douglas Suttles, BP's Chief Operating
Officer for Exploration and Production from January 2009 to January 2011.
Judge Ellison held that the ADS investors had adequately
pled misrepresentations regarding BP's progress in the year's preceding the
Deepwater Horizon disaster in implementing the recommendations of an
independent committee BP had organized and that had been chaired by former U.S.
Senator Howard Baker (the so-called Baker Report); regarding its ability to
respond to a spill in the Gulf of Mexico; regarding its reported retaliation
against employees who raised safety concerns; and regarding post-spill
estimates of the spill amounts. Judge Ellison also found that he could not
conclude at this stage that the alleged misrepresentations were immaterial.
With respect to the plaintiffs' allegations concerning
the company's implementation of the Baker Report recommendations, Judge Ellison
said that "the Deepwater Horizon explosion, subsequent investigation, and other
facts Plaintiffs allege pointing to similarities between the Deepwater Horizon
accident and BP's history of safety failures support Plaintiffs' contention
that BP seriously overstated the 'progress' it had made in implementing the
Baker Panel's recommendations."
Judge Ellison also found that the plaintiffs had
"sufficiently pleaded facts to demonstrate that BP misrepresented the size of
the spill it was prepared to respond to in the Gulf and misrepresented the
Company's general spill response capabilities."
In addition, he found that "the alleged facts
sufficiently, even forcefully, establish that BP was knowingly retaliating
against workers who reported safety concerns, even while issuing statements
explicitly denying any retaliation."
Judge Ellison granted the motions of eight of the ten
individual defendants, ruling either that the plaintiffs had not adequately
tied the individuals to the allegedly misleading statements or had not
adequately alleged scienter. However, he concluded that the scienter
allegations were sufficient as to the BP entity defendants, Hayward and
Suttles. With respect to Hayward, Judge Eillson noted that "Hayward defined his
position as CEO to include a special and targeted focus on process safety.
Taking him at his own word, the Court finds that Plaintiffs have sufficiently
pleaded scienter with respect to Hayward."
With respect to the BP entities and Suttles, Judge
Ellison focused in particular on the disclosures following the accident
regarding the size of the spill and BP's recovery capabilities. He observed
that "the difference between what BP was actually able to recover and what it
claimed it could recover is so great that the projected numbers ... appeared to
have been invented out of thin air." Though BP claimed it could recover nearly
500,000 barrels of oil a day, forty-nine days after the explosion, BP was
recovering only 15,000 barrels a day.
However, based on the U.S. Supreme Court's holding in Morrison
v. National Australia Bank, Judge Ellison granted the defendants' motion to
dismiss the Section 10(b) claims of U.S. investors who had purchased ordinary
BP shares on the London Stock Exchange. He also held that these investors New
York common law class action claims were precluded under SLUSA. Finally, he
held that the Court lacked original jurisdiction over these investors claims
under English law, holding that because the Court lacked jurisdiction over the
Section 10(b) claims, the court lacked supplemental jurisdiction over the
Englsh law claims.
In granting the defendants' motion to dismiss the Ludlow
plaintiffs' claims without prejudice, Judge Ellison found that certain of the
defendants' statements in the months preceding the Deepwater Horizon disaster
were materially misleading. However, with respect to those statements, Judge
Ellison found that the plaintiffs had not adequately pled scienter. Judge
Ellison observed that "the court is acutely aware that federal legislation and
authoritative precedents have created for plaintiffs in all securities actions
formidable challenges to successful pleading. Today's decision is a reflection
of that. By no means, however, does the Court mean to signal that no pleadings
that Plaintiffs could proffer would be successful. An amended complaint may
well be able to adduce additional information responsive to this Court's
concerns." He granted the Ludlow plaintiffs' twenty days in which to file an
amended complaint.
Discussion
Though Judge Ellison's rulings eliminate many of the New
York and Ohio plaintiffs' allegations and several of the individual defendants,
substantial parts of their claims survived the dismissal motion and will go
forward. Moreover, the possibility remains that the Ludlow plaintiffs may be
able to amend their pleadings sufficiently to survive a renewed motion to
dismiss.
The dismissal of the ordinary shareholders' claims is a
more substantial blow. As Nate Raymond notes in his February 13, 2012 article
on Am Law Litigation Daily about Judge Ellison's rulings (here),
the ADS investors may represent a smaller part of BP investors.
Nevertheless, the claims that will for sure going forward
are substantial. In his recitation of these allegations, Judge Ellison betrayed
a sense of outrage, undoubtedly a reflection of the magnitude of this disaster.
Neither the survival of these allegations nor the Court's unmistakable sense of
outrage bodes well for BP. The possibility of a trial in the Southern District
of Texas is a prospect that BP could not rationally contemplate. However, the
nature and magnitude of the allegations and the sheer size of the market cap
loss could make any attempt to settle this case extremely difficult,
notwithstanding the reduced size of the investor class. For all of these
reasons, it will be very interesting to watch this case as it goes forward.
Judge Ellison's holdings regarding the U.S. investors who
purchased their shares on the London exchange add an interesting additional
element to his opinion. His ruling that Morrison precludes the claims of
these investors (sometimes referred to as F-squared investors, because the
involve U.S. investors who purchased shares in a foreign company on a foreign
exchange), is consistent
with rulings of other courts who have been faced with f-squared investor
claims in the wake of Morrison. However, his conclusion that the New York
common law claims were precluded under SLUSA and that he lacked jurisdiction
over the English law claims are interesting and could be important in other
cases where plaintiffs' seek to circumvent Morrison. (It is worth noting
in that regard that the court presiding over the Toyota shareholders'
securities class action has
rejected the efforts of plaintiffs in that case to rely on Japanese law.)
Alison Frankel has a detailed analysis of the Court's
consideration of the Morrison issues in her February 13, 2012 post on Thomson
Reuters News & Insight, here.
The fact is, however, that these F-Squared investors have
just as much reason to feel aggrieved by the defendants' alleged
misrepresentations as the ADS investors. The F-squared investors just don't get
access to a U.S .court, which leaves them with the dilemma of whether they can
pursue their claims elsewhere. Hurdles to trying to pursue these kinds of
claims in England (lack of class action procedures, loser pays rules) might
encourage these displaced investors to consider claims elsewhere - perhaps
Canada or the Netherlands? It will be interesting to see whether these
investors try their luck elsewhere.
Judge Ellison's concluding remarks in which he granted
the Ludlow plaintiffs leave to attempt to replead their allegation sounded
remarkably sympathetic. He not only acknowledged how hard it is for plaintiffs
to try to overcome the threshold pleading obstacles, but he sounded like he was
sorry about it, as if he felt that perhaps that plaintiffs ought not to
be faced with such onerous initial pleading hurdles. Those sentiments are of
course cold comfort to the Ludlow plaintiffs if they are unable to overcome the
pleading hurdles with their amended pleadings. (For those who are curious,
Ellison, who was a Rhodes scholar and who clerked for Justice Harry Blackmun,
was appointed to the bench by President Clinton.)
One final note. I was struck in reading Judge Ellison's
opinion how influenced he was by BP's communications after the disaster. These
opinions provide a very stark reminder that the way that a reporting company
manages bad news can substantially affect the company's securities litigation
exposure. These opinions and Judge Ellison's retelling of the tale provide some
pretty stark lessons for other companies trying to deal with bad news. A
negative lesson from these circumstances is that there are things a company can
do to avoid further damaging the company even after disaster has struck - and
there are things a company can do to make things worse, too
A February 13, 2012 Bloomberg article regarding
Judge Ellison's rulings can be found here.
In an earlier post (here)
I discuss Judge Ellison's September 2011 ruling dismissing the
BP Deepwater Horizon derivative suit in favor of an English forum.
Read
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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