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From Securities Regulation Daily, May 21, 2014

Court grants reformulated class certification against BP in connection with Deepwater Horizon explosion

By R. Jason Howard, J.D.

In the continuing saga surrounding the April 20, 2010 explosion of BP’s Deepwater Horizon drilling platform, the United States District Court for the Southern District of Texas issued a Memorandum and Order granting the plaintiffs’ renewed motion for class certification as to the post-explosion “spill severity” subclass and granting plaintiffs’ motion for leave to amend and file the third consolidated amended class action complaint, but denied the plaintiffs’ renewed motion for class certification as to the pre-explosion “process safety” subclass (In Re: BP p.l.c. Securities Litigation, May 20, 2014, Ellison, K.).

Issue before the court. In determining the outcome of plaintiffs’ renewed motion, the court stated that the issue before it was “two-pronged but narrow” and that the court “must determine whether plaintiffs’ proposed damages methodologies (1) quantify the injury caused by the defendants’ alleged wrongful conduct, and (2) can be deployed on a classwide basis such that the common issues will predominate over individualized ones.”

The subclasses. The plaintiffs’ previous attempt to certify the class met with opposition when the court noted that the plaintiffs met the prerequisites of Rule 23(a) and Rule 23(b)(3) except for the predominance of classwide damages. Subsequently, the court agreed with the defendants’ criticism of a “classwide damages model which did not hew to plaintiffs’ theory of liability,” based on the defendants anticipation that the plaintiffs’ expert would propose a “constant dollar” model of inflation.

The plaintiffs then modified the subclasses to the pre-explosion or process safety subclass which consisted of “persons or entities who purchased or otherwise acquired BP American Depository Shares (ADSs) between November 8, 2007 and April 20, 2010 and were injured thereby” and the post-explosion or spill severity subclass consisting of “persons or entities who purchased or otherwise acquired BP ADSs between either April 26, 2010 or April 29, 2010 and May 28, 2010 and were injured thereby.”

Pre-explosion – process safety subclass. Here, the plaintiffs’ alleged that the defendants “repeatedly and falsely assured the market that process safety improvements…were being rolled out throughout the organization, across the globe.” The plaintiffs’ contention was that these misrepresentations lured the market into believing that BP was safer than it really was.

The loss calculation methodology employed by the plaintiffs involved computing the total investment losses caused by the fraudulent statements by measuring the decline in stock price on days on which “corrective information” entered the marketplace. Eight corrective events were suggested by the plaintiffs that related to the process safety subclass misrepresentations. The methodology then would factor in materialized risk and apportion the alleged compensable losses across the alleged misrepresentations.

The plaintiffs argued that the process safety misstatements were a proximate cause of the post-explosion investment losses because the plaintiffs were deprived of the opportunity to divest prior to the explosion. This, the court noted, “injects individualized inquiries into what is supposed to be a classwide model of recovery,” and that the “causal link withstands scrutiny only if Defendants’ misrepresentations induced a transaction—i.e., if a particular investor would not have purchased the security had he known the true state of BP’s process safety programs.”

In the end, the court said that the plaintiffs simply did not show that the damages of pre-explosion investors could be calculated on a classwide basis consistent with their theory of liability.

Post-explosion – spill severity. The court did find that the damages methodology for calculating the post-explosion spill severity subclass was appropriate and that none of the defendants’ criticisms of class certification was sufficient to deny class certification.

The defendants’ first criticism concerned the calculation method. Here, the court noted that its concern over using the “constant dollar” approach to calculating damages was relevant to the pre-explosion time frame only and that having reviewed that methodology in the isolated context of the spill severity misstatements, “the Court perceives no legal or logical impediment to its use.”

Despite the other criticisms, the court acknowledged that the damages methodology proposed for the post-explosion subclass met the requirements for Rule 23(b)(3) because it attempts to quantify the injury caused by the defendants’ alleged wrongful acts and it can be deployed on a classwide basis.

Motion for leave to amend. Concerning the motion for leave, the court noted that the “most important and consequential” amendment was the addition of a new fourth spill severity misrepresentation in addition to other amendments meant to reconcile the complaint with the court’s previous orders on motion to dismiss class certification. Here, the court granted leave to amend pursuant to Rule 15(a)(2).

The case is No. 4:10-md-2185.

Attorneys: Jordanna G. Thigpen (Cotchett Pitre McCarthy) for Robert Ludlow. Dianne M. Nast (Nast Law LLC) for Johnson Investment Counsel Inc. Albert M. Myers (Kahn Swick & Foti, LLC) for La. Municipal Police Employees' Retirement System. Robert "Mike" Brock (Covington & Burling LLP) and Scott W. Fowkes (Kirkland & Ellis LLP) for BP PLC and BP America Inc.

Companies: Johnson Investment Counsel Inc.; BP PLC; BP America Inc.

MainStory: TopStory Enforcement TexasNews

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