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”).
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.
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.